Proposed Rule2023-19032
Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees
Primary source
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Published
September 8, 2023
Issuing agencies
Labor DepartmentWage and Hour Division
Abstract
In this proposal, the Department of Labor (Department) is updating and revising the regulations issued under the Fair Labor Standards Act implementing the exemptions from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and computer employees. Significant proposed revisions include increasing the standard salary level to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South)--$1,059 per week ($55,068 annually for a full-year worker)--and increasing the highly compensated employee total annual compensation threshold to the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally ($143,988). The Department is also proposing to add to the regulations an automatic updating mechanism that would allow for the timely and efficient updating of all the earnings thresholds.
Full Text
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[Federal Register Volume 88, Number 173 (Friday, September 8, 2023)]
[Proposed Rules]
[Pages 62152-62240]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-19032]
[[Page 62151]]
Vol. 88
Friday,
No. 173
September 8, 2023
Part II
Department of Labor
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Wage and Hour Division
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29 CFR Part 541
Defining and Delimiting the Exemptions for Executive, Administrative,
Professional, Outside Sales, and Computer Employees; Proposed Rule
Federal Register / Vol. 88, No. 173 / Friday, September 8, 2023 /
Proposed Rules
[[Page 62152]]
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DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 541
RIN 1235-AA39
Defining and Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales, and Computer Employees
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Notice of proposed rulemaking.
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SUMMARY: In this proposal, the Department of Labor (Department) is
updating and revising the regulations issued under the Fair Labor
Standards Act implementing the exemptions from minimum wage and
overtime pay requirements for executive, administrative, professional,
outside sales, and computer employees. Significant proposed revisions
include increasing the standard salary level to the 35th percentile of
weekly earnings of full-time salaried workers in the lowest-wage Census
Region (currently the South)--$1,059 per week ($55,068 annually for a
full-year worker)--and increasing the highly compensated employee total
annual compensation threshold to the annualized weekly earnings of the
85th percentile of full-time salaried workers nationally ($143,988).
The Department is also proposing to add to the regulations an automatic
updating mechanism that would allow for the timely and efficient
updating of all the earnings thresholds.
DATES: Interested persons are invited to submit written comments on
this notice of proposed rulemaking (NPRM) on or before November 7,
2023.
ADDRESSES: You may submit comments, identified by Regulatory
Information Number (RIN) 1235-AA39, by either of the following methods:
<bullet> Electronic Comments: Submit comments through the Federal
eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Follow the
instructions for submitting comments.
<bullet> Mail: Address written submissions to: Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW,
Washington, DC 20210.
Instructions: Response to this NPRM is voluntary. The Department
requests that no business proprietary information, copyrighted
information, or personally identifiable information be submitted in
response to this NPRM. Commenters submitting file attachments on
<a href="https://www.regulations.gov">https://www.regulations.gov</a> are advised that uploading text-recognized
documents--i.e., documents in a native file format or documents which
have undergone optical character recognition (OCR)--enable staff at the
Department to more easily search and retrieve specific content included
in your comment for consideration.
Anyone who submits a comment (including duplicate comments) should
understand and expect that the comment, including any personal
information provided, will become a matter of public record and will be
posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>. The Department
posts comments gathered and submitted by a third-party organization as
a group under a single document ID number on <a href="https://www.regulations.gov">https://www.regulations.gov</a>. All comments must be received by 11:59 p.m. ET on
November 7, 2023, for consideration in this rulemaking; comments
received after the comment period closes will not be considered.
The Department strongly recommends that commenters submit their
comments electronically via <a href="https://www.regulations.gov">https://www.regulations.gov</a> to ensure
timely receipt prior to the close of the comment period, as the
Department continues to experience delays in the receipt of mail.
Please submit only one copy of your comments by only one method.
Docket: For access to the docket to read background documents or
comments, go to the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW,
Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-
free number). Alternative formats are available upon request by calling
1-866-487-9243. If you are deaf, hard of hearing, or have a speech
disability, please dial 7-1-1 to access telecommunications relay
services.
Questions of interpretation or enforcement of the agency's existing
regulations may be directed to the nearest Wage and Hour Division (WHD)
district office. Locate the nearest office by calling the WHD's toll-
free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5
p.m. in your local time zone, or log onto WHD's website at <a href="https://www.dol.gov/agencies/whd/contact/local-offices">https://www.dol.gov/agencies/whd/contact/local-offices</a> for a nationwide listing
of WHD district and area offices.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The Fair Labor Standards Act (FLSA or Act) requires covered
employers to pay employees a minimum wage and, for employees who work
more than 40 hours in a week, overtime premium pay of at least 1.5
times the employee's regular rate of pay. Section 13(a)(1) of the FLSA,
which was included in the original Act in 1938, exempts from the
minimum wage and overtime pay requirements ``any employee employed in a
bona fide executive, administrative, or professional capacity.'' \1\
The exemption is commonly referred to as the ``white-collar'' or
executive, administrative, or professional (EAP) exemption. The statute
delegates to the Secretary of Labor (Secretary) the authority to define
and delimit the terms of the exemption. Since 1940, the regulations
implementing the EAP exemption have generally required that each of the
following three tests must be met: (1) the employee must be paid a
predetermined and fixed salary that is not subject to reduction because
of variations in the quality or quantity of work performed (the salary
basis test); (2) the amount of salary paid must meet a minimum
specified amount (the salary level test); and (3) the employee's job
duties must primarily involve executive, administrative, or
professional duties as defined by the regulations (the duties test).
The employer bears the burden of establishing the applicability of the
exemption.\2\ Job titles and job descriptions do not determine EAP
exemption status, nor does merely paying an employee a salary.
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\1\ 29 U.S.C. 213(a)(1).
\2\ See, e.g., Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S.
190, 209 (1966); Walling v. Gen. Indus. Co., 330 U.S. 545, 547-48
(1947).
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Consistent with its broad authority under the statute, the
Department is proposing compensation thresholds that will work
effectively with the standard duties test and the highly compensated
employee duties test to better identify who is employed in a bona fide
EAP capacity. Specifically, the Department is proposing to set the
standard salary level at the 35th percentile of weekly earnings of
full-time salaried workers in the lowest-wage Census Region ($1,059 per
week or $55,068 annually for a full-year worker) \3\ and the highly
[[Page 62153]]
compensated employee total annual compensation threshold at the
annualized weekly earnings of the 85th percentile of full-time salaried
workers nationally ($143,988). These proposed compensation thresholds
are firmly grounded in the authority that the FLSA grants to the
Secretary to define and delimit the EAP exemption, a power the
Secretary has exercised for over 80 years.
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\3\ In determining earnings percentiles in its part 541
rulemakings since 2004, the Department has consistently looked at
nonhourly earnings for full-time workers from the Current Population
Survey (CPS) Merged Outgoing Rotation Group (MORG) data collected by
the Bureau of Labor Statistics (BLS). As explained in section
VII.B.5, the Department considers data representing compensation
paid to nonhourly workers to be an appropriate proxy for
compensation paid to salaried workers, although for simplicity the
Department uses the terms salaried and nonhourly interchangeably in
this proposal. The Department relied on CPS MORG data for calendar
year 2022 to develop this NPRM, including to determine the proposed
salary level. In the final rule, the Department will use the most
recent data available, which will change the dollar figures. For
example, if after consideration of comments received, the final rule
were to adopt the proposed salary level of the 35th percentile of
weekly earnings of full-time salaried workers in the lowest-wage
Census region (currently the South), in the fourth quarter of 2023
the Department projects that the salary threshold could be $1,140
per week or $59,285 for a full-year worker. To calculate this, the
Department applied the Congressional Budget Office projections of
the employment cost index for wages and salaries of workers in
private industry growing by 4.5 percent in 2023 to the 35th
percentile of weekly earnings of full-time salaried workers in the
South from the fourth quarter of 2022, which was $1,091 per week or
$56,732 for a full-year worker. As an additional example, in the
first quarter of 2024, the Department projects that the salary
threshold could be $1,158 per week or $60,209 for a full-year
worker; the Department applied the 4.5 percent growth rate to the
35th percentile of weekly earnings of full-time salaried workers in
the South from the first quarter of 2023, which was $1,108 per week
or $57,616 for a full-year worker.
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The proposed increase in the standard salary level to the 35th
percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region better fulfills the Department's obligation
under the statute to define and delimit who is employed in a bona fide
EAP capacity. Upon reflection, the Department has determined that its
rulemakings over the past 20 years, since the Department simplified the
test for the EAP exemption in 2004 by replacing the historic two-test
system for determining exemption status with the single standard test,
have vacillated between two distinct approaches: One used in rules in
2004 \4\ and 2019,\5\ that exempted lower-paid workers who historically
had been entitled to overtime because they did not meet the more
detailed duties requirements of the test that was in place from 1949 to
2004; and one used in a rule in 2016,\6\ that restored overtime
protection to lower-paid white-collar workers who performed significant
amounts of nonexempt work but also removed from the exemption other
lower-paid workers who historically were exempt under the prior test,
an approach that received unfavorable treatment in litigation.\7\
Having grappled with these different approaches to setting the standard
salary level, this proposal retains the simplified standard test, the
benefits of which were recognized in the Department's 2004, 2016 and
2019 rulemakings,\8\ while updating the standard salary level to
account for earnings growth since the 2019 rule and adjusting the
salary level methodology based on the lessons learned in recent
rulemakings.
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\4\ 69 FR 22121 (April 23, 2004).
\5\ 84 FR 51230 (Sept. 27, 2019).
\6\ 81 FR 32391 (May 23, 2016).
\7\ The Department never enforced the 2016 rule because it was
invalidated by the U.S. District Court for the Eastern District of
Texas. See Nevada v. U.S. Department of Labor, 275 F.Supp.3d 795
(E.D. Tex. 2017).
\8\ See 84 FR 51243-45; 81 FR 32414, 32444-45; 69 FR 22126-28.
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The Department's proposed standard salary level will, in
combination with the standard duties test, better define and delimit
which employees are employed in a bona fide EAP capacity. By setting a
salary level above what the methodology used in 2004 and 2019 would
produce using current data, the proposal would ensure that, consistent
with the Department's historical approach to the exemption, fewer
lower-paid white-collar employees who perform significant amounts of
nonexempt work are included in the exemption. At the same time, by
setting the salary level below the methodology used in 2016, the
proposal would allow employers to continue to use the exemption for
many lower-paid white-collar employees who were made exempt under the
2004 standard duties test. The combined effect would be a more
effective test for determining who is employed in a bona fide EAP
capacity.
The Department is also proposing to increase the salary levels in
the U.S territories, which have not been changed since 2004.
Traditionally, the Department has set special salary levels only for
territories that were not subject to the Federal minimum wage. In the
2004 rule, the Department ended the use of special salary levels for
Puerto Rico and the U.S. Virgin Islands, as they had become subject to
the Federal minimum wage since the Department last updated the part 541
salary levels, and set a special salary level only for American Samoa,
which remained not subject to the Federal minimum wage.\9\ In the 2019
rule, however, the Department elected to preserve the salary level set
in 2004 ($455 per week) for employees in Puerto Rico, Guam, the U.S.
Virgin Islands, and the Commonwealth of the Northern Mariana Islands
(CNMI) instead of applying the new standard salary level of $684 per
week that applied to employees in the 50 states and the District of
Columbia.\10\ In doing so, the Department for the first time set a
special salary level for employees in territories that were subject to
the Federal minimum wage. In accordance with the Department's
traditional practice, and in the interest of applying the FLSA
uniformly to areas subject to the Federal minimum wage, the Department
is proposing to apply the standard salary level to employees in all
territories that are subject to the Federal minimum wage and to
maintain a special salary level only for employees in American Samoa,
because that territory remains subject to special minimum wage rates.
The Department is also proposing to update the special base rate for
employees in the motion picture industry.
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\9\ 69 FR 22172.
\10\ 84 FR 51246.
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The Department is also proposing to update the earnings threshold
for the highly compensated employee (HCE) exemption, which was added to
the regulations in 2004 and applies to certain highly compensated
employees and combines a much higher annual compensation requirement
with a minimal duties test. The HCE test's primary purpose is to serve
as a streamlined alternative for very highly compensated employees
because a very high level of compensation is a strong indicator of an
employee's exempt status, thus eliminating the need for a detailed
duties analysis.\11\ In this rulemaking, the Department is proposing to
increase the HCE total annual compensation threshold to the annualized
weekly earnings amount of the 85th percentile of full-time salaried
workers nationally ($143,988). The proposed HCE threshold is high
enough to exclude employees who are not ``at the very top of [the]
economic ladder'' \12\ and would guard against the unintended exemption
of workers who are not bona fide EAP employees, including those in
high-income regions and industries.
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\11\ See 69 FR 22173-74.
\12\ Id. at 22174.
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In each of its part 541 rulemakings since 2004, the Department
recognized the need to regularly update the earnings thresholds to
ensure that they remain effective in helping differentiate between
exempt and nonexempt employees. As the Department observed in these
rulemakings, even a well-calibrated salary level that is not kept up to
date becomes obsolete as wages for nonexempt workers increase over
[[Page 62154]]
time.\13\ Long intervals between rulemakings have resulted in eroded
earnings thresholds based on outdated earnings data that were ill-
equipped to help identify bona fide EAP employees.
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\13\ 84 FR 51250-51; 81 FR 32430; see also 69 FR 22212, 22164.
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To address this problem, in the 2004 and 2019 rules the Department
expressed its commitment to regularly updating the salary levels.\14\
In the 2016 rule, it included a regulatory provision to automatically
update the salary levels.\15\ Based on its long experience with
updating the salary levels, the Department has determined that adopting
a regulatory provision for automatically updating the salary levels,
with an exception for pausing future updates under certain conditions,
is the most viable and efficient way to ensure the EAP exemption
earnings thresholds keep pace with changes in employee pay and thus
remain effective in helping determine exemption status. The proposed
automatic updating mechanism would allow for the timely, predictable,
and efficient updating of the earnings thresholds.
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\14\ 69 FR 22171; 84 FR 51251-52.
\15\ 81 FR 32430.
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The Department estimates that in Year 1, 3.4 million currently
exempt employees who earn at least the current salary level of $684 per
week but less than the proposed standard salary level of $1,059 per
week would, absent the employer paying them at or above the new salary
level, gain overtime protection. For more than half of these employees,
this proposal would restore overtime protections that the employees
would have been entitled to under every rule prior to the 2019 rule.
The Department also estimates that 248,900 employees who are currently
exempt under the HCE test would be affected by the proposed increase in
the HCE total annual compensation level. Absent the employer paying
these employees at or above the new HCE level, the exemption status of
these employees would turn on the standard duties test (which these
employees do not meet) rather than the minimal duties test that applies
to employees earning at or above the HCE threshold. The economic
analysis of the proposed rule quantifies the direct costs resulting
from the rule: (1) regulatory familiarization costs; (2) adjustment
costs; and (3) managerial costs. The Department estimates that total
annualized direct employer costs over the first 10 years would be $664
million with a 7 percent discount rate. This rulemaking will also give
employees higher earnings in the form of transfers of income from
employers to employees. The Department estimates annualized transfers
would be $1.3 billion, with a 7 percent discount rate.
II. Background
A. The FLSA
The FLSA generally requires covered employers to pay employees at
least the Federal minimum wage (currently $7.25 an hour) for all hours
worked, and overtime premium pay of one and one-half times the regular
rate of pay for all hours worked over 40 in a workweek.\16\ However,
section 13(a)(1) of the FLSA, codified at 29 U.S.C. 213(a)(1), provides
an exemption from both minimum wage and overtime pay for ``any employee
employed in a bona fide executive, administrative, or professional
capacity . . . or in the capacity of [an] outside salesman (as such
terms are defined and delimited from time to time by regulations of the
Secretary [of Labor], subject to the provisions of [the Administrative
Procedures Act] . . .).'' The FLSA does not define the terms
``executive,'' ``administrative,'' ``professional,'' or ``outside
salesman,'' but rather delegates that task to the Secretary. Pursuant
to Congress's grant of rulemaking authority, since 1938 the Department
has issued regulations at 29 CFR part 541 to define and delimit the
scope of the section 13(a)(1) exemption.\17\ Because Congress
explicitly delegated to the Secretary the authority to define and
delimit the specific terms of the exemption, the regulations so issued
have the binding effect of law.\18\
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\16\ See 29 U.S.C. 206(a), 207(a).
\17\ See Helix Energy Solutions, Group Inc. v. Hewitt, 143 S.Ct.
677, 682 (2023) (``Under [section 13(a)(1)], the Secretary sets out
a standard for determining when an employee is a bona fide
executive.'').
\18\ See Betterton v. Francis, 432 U.S. 416, 425 n.9 (1977).
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The exemption for executive, administrative, or professional
employees (EAP exemption) was included in the original FLSA legislation
passed in 1938.\19\ It was modeled after similar provisions contained
in the earlier National Industrial Recovery Act of 1933 (NIRA) and
state law precedents.\20\ As the Department has explained in prior
rules, the EAP exemption is premised on two policy considerations.
First, the type of work exempt employees perform is difficult to
standardize to any time frame and cannot be easily spread to other
workers after 40 hours in a week, making enforcement of the overtime
provisions difficult and generally precluding the potential job
expansion intended by the FLSA's time-and-a-half overtime premium.\21\
Second, exempted workers typically earn salaries well above the minimum
wage and are presumed to enjoy other privileges to compensate them for
their long hours of work. These include, for example, above-average
fringe benefits and better opportunities for advancement, setting them
apart from nonexempt workers entitled to overtime pay.\22\
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\19\ See Fair Labor Standards Act of 1938, Public Law 75-718,
13(a)(1), 52 Stat. 1060, 1067 (June 25, 1938).
\20\ See National Industrial Recovery Act, Public Law 73-67, ch.
90, title II, 206(2), 48 Stat 195, 204-5 (June 16, 1933).
\21\ See Report of the Minimum Wage Study Commission, Volume IV,
pp. 236 and 240 (June 1981).
\22\ See id.
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Although section 13(a)(1) exempts covered employees from both the
FLSA's minimum wage and overtime requirements, its most significant
impact is its removal of these employees from the Act's overtime
protections. An employer may employ such employees for any number of
hours in the workweek without paying the minimum hourly wage or an
overtime premium. Some state laws have stricter exemption standards
than those described above. The FLSA does not preempt any such stricter
state standards. If a state establishes a higher standard than the
provisions of the FLSA, the higher standard applies in that state.\23\
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\23\ See 29 U.S.C. 218(a).
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B. Regulatory History
The Department's part 541 regulations have consistently looked to
the duties performed by the employee and the salary paid by the
employer in determining whether an individual is employed in a bona
fide executive, administrative, or professional capacity. Since 1940,
the Department's implementing regulations have generally required each
of three tests to be met for the exemption to apply: (1) the employee
must be paid a predetermined and fixed salary that is not subject to
reduction because of variations in the quality or quantity of work
performed (the salary basis test); (2) the amount of salary paid must
meet a minimum specified amount (the salary level test); and (3) the
employee's job duties must primarily involve executive, administrative,
or professional duties as defined by the regulations (the duties test).
1. The Part 541 Regulations From 1938 to 2004
The Department issued the first version of the part 541 regulations
in October 1938.\24\ The Department's initial regulations included a
$30 per
[[Page 62155]]
week compensation requirement for executive and administrative
employees, as well as a duties test that prohibited employers from
using the exemption for executive, administrative, and professional
employees who performed ``[a] substantial amount of work of the same
nature as that performed by nonexempt employees of the employer.'' \25\
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\24\ 3 FR 2518 (Oct. 20, 1938).
\25\ Id.
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The Department issued the first update to its part 541 regulations
in October 1940,\26\ following extensive public hearings.\27\ Among
other changes, the 1940 update added the salary basis requirement to
the tests for executive, administrative, and professional employees;
newly applied the salary level requirement to professional employees;
and introduced a 20 percent cap on nonexempt work for executive and
professional employees, replacing language which prohibited the
performance of a ``substantial amount'' of nonexempt work.\28\
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\26\ 5 FR 4077 (Oct. 15, 1940).
\27\ See ``Executive, Administrative, Professional . . . Outside
Salesman'' Redefined, Wage and Hour Division, U.S. Department of
Labor, Report and Recommendations of the Presiding Officer [Harold
Stein] at Hearings Preliminary to Redefinition (Oct. 10, 1940)
(Stein Report).
\28\ 5 FR 4077.
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The Department conducted further hearings on the part 541
regulations in 1947,\29\ and issued revised regulations in December
1949.\30\ The 1949 rulemaking updated the salary levels set in 1940 and
introduced a second, less stringent duties test for higher paid
executive, administrative, and professional employees.\31\ Thus,
beginning in 1949, the part 541 regulations contained two tests for the
EAP exemption. These tests became known as the ``long'' test and the
``short'' test. The long test paired a lower earnings threshold with a
more rigorous duties test that generally limited the performance of
nonexempt work to no more than 20 percent of an employee's hours worked
in a workweek. The short test paired a higher salary level and a less
rigorous duties test, with no specified limit on the performance of
nonexempt work. From 1958 until 2004, the regulations in place
generally set the long test salary level to exclude from exemption
approximately the lowest-paid 10 percent of salaried white-collar
employees who performed EAP duties in lower wage areas and industries
and set the short test salary level significantly higher. The salary
and duties components of each test complemented each other, and the two
tests worked in combination to determine whether an individual was
employed in a bona fide EAP capacity. Lower-paid employees who met the
long test salary level but did not meet the higher short test salary
level were subject to the long duties test which ensured that employees
were, in fact, employed in a bona fide EAP capacity by limiting the
amount of time they could spend on nonexempt work. Employees who met
the higher short test salary level were considered to be more likely to
meet the requirements of the long duties test and thus were subject to
a short-cut duties test for determining exemption status.
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\29\ See Report and Recommendations on Proposed Revisions of
Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage and
Hour and Public Contracts Divisions, U.S. Department of Labor (June
30, 1949) (Weiss Report).
\30\ See 14 FR 7705 (Dec. 24, 1949).
\31\ Id. at 7706.
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Additional changes to the regulations, including salary level
updates, were made in 1954,\32\ 1958,\33\ 1961,\34\ 1963,\35\ 1967,\36\
1970,\37\ 1973,\38\ and 1975.\39\ The Department revised the part 541
regulations twice in 1992 but did not update the salary threshold at
that time.\40\ None of these updates changed the basic structure of the
long and short tests.
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\32\ 19 FR 4405 (July 17, 1954).
\33\ 23 FR 8962 (Nov. 18, 1958).
\34\ 26 FR 8635 (Sept. 15, 1961).
\35\ 28 FR 9505 (Aug. 30, 1963).
\36\ 32 FR 7823 (May 30, 1967).
\37\ 35 FR 883 (Jan. 22, 1970).
\38\ 38 FR 11390 (May 7, 1973).
\39\ 40 FR 7091 (Feb. 19, 1975).
\40\ The Department first created a limited exception from the
salary basis test for public employees. 57 FR 37677 (Aug. 19, 1992).
The Department also implemented a 1990 law requiring it to
promulgate regulations permitting employees in certain computer-
related occupations to qualify as exempt under section 13(a)(1) of
the FLSA. 57 FR 46744 (Oct. 9, 1992); see Public Law 101-583, sec.
2, 104 Stat. 2871 (Nov. 15, 1990).
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The Department described the salary levels adopted in the 1975 rule
as ``interim rates,'' intended to ``be in effect for an interim period
pending the completion of a study [of worker earnings] by the Bureau of
Labor Statistics . . . in 1975.'' \41\ However, those salary levels
remained in effect until 2004. The utility of the salary levels in
helping to define the EAP exemption decreased as wages rose during this
period. In 1991, the Federal minimum wage rose to $4.25 per hour,\42\
which for a 40-hour week exceeded the lower long test salary level of
$155 per week for executive and administrative employees and equaled
the long test salary level of $170 per week for professional employees.
In 1997, the Federal minimum wage rose to $5.15 per hour,\43\ which for
a 40-hour week not only exceeded the long test salary levels, but also
was close to the higher short test salary level of $250 per week.
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\41\ 40 FR 7091.
\42\ See Public Law 101-157, sec. 2, 103 Stat. 938 (Nov. 17,
1989).
\43\ See Public Law 104-188, sec. 2104(b), 110 Stat 1755 (Aug.
20, 1996).
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2. Part 541 Regulations From 2004 to 2019
The Department issued a final rule in April 2004 (the 2004 rule)
\44\ that updated the part 541 salary levels for the first time since
1975 and made several significant changes to the regulations. Most
significantly, the Department eliminated the separate long and short
tests and replaced them with a single standard test. The Department set
the standard salary level at $455 per week, which was equivalent to the
20th percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region (the South) and in the retail industry
nationally. The Department paired the new standard salary level test
with a new standard duties test for executive, administrative, and
professional employees, respectively, which was substantially
equivalent to the short duties test used in the two-test system.\45\
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\44\ 69 FR 22122.
\45\ See id. at 22192-93 (acknowledging ``de minimis differences
in the standard duties tests compared to the short duties tests'').
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In the 2004 rule, the Department acknowledged that the switch from
a two-test system to a one-test system was a significant change in the
regulatory structure,\46\ and noted that the shift to setting the
salary level based on ``the lowest 20 percent of salaried employees in
the South, rather than the lowest 10 percent'' of EAP employees was
made, in part, ``because of the proposed change from the `short' and
`long' test structure.'' \47\ The Department asserted that elimination
of the long duties test was warranted because ``the relatively small
number of employees currently earning from $155 to $250 per week, and
thus tested for exemption under the `long' duties test, will gain
stronger protections under the increased minimum salary level which . .
. guarantees overtime protection for all employees earning less than
$455 per week.'' \48\ The Department acknowledged, however, that the
new standard salary level was comparable to the long test salary level
used in the two-test system (i.e., if the Department's long test salary
level methodology had been applied to contemporaneous
[[Page 62156]]
data).\49\ Thus, employees who would have been subject to the more
rigorous long duties test if the two-test system had been updated were
subject to the equivalent of the short duties test under the new
standard test. For example, under the 2004 rule's standard test, an
employee who earned just over the rule's standard salary threshold of
$455 in weekly salary, and who met the standard duties test, was exempt
even if they would not have met the previous long duties test because
they spent substantial amounts of time performing nonexempt work. If
the Department had instead retained the two-test system and updated the
long test salary level to $455, that same employee would have been
nonexempt because they would have been subject to the more rigorous
duties analysis due to their lower salary.
---------------------------------------------------------------------------
\46\ See id. at 22126-28.
\47\ Id. at 22167.
\48\ Id. at 22126.
\49\ Id. at 22169. The Department last set the long and short
test salary levels in 1975. Throughout this proposal, when the
Department refers to the relationship of salary levels set in 2004,
2016, and 2019 to equivalent long or short test salary levels, it is
referring to salary levels based on current (at the relevant point
in time) data that, in the case of the long test salary level, would
exclude the lowest-paid 10 percent of exempt EAP employees in low-
wage industries and areas and, in the case of the short test salary
level, would be 149 percent of a contemporaneous long test salary
level. The short test salary ratio of 149 percent is the simple
average of the 15 historical ratios of the short test salary level
to the long test salary level. See 81 FR 32467 & n.149.
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In the 2004 rule, the Department also created a new test for
exemption for certain highly compensated employees.\50\ The HCE test
paired a minimal duties requirement--customarily and regularly
performing at least one of the exempt duties or responsibilities of an
EAP employee--with a high total annual compensation requirement of
$100,000, a threshold that exceeded the annual earnings of
approximately 93.7 percent of salaried workers nationwide.\51\ The
Department also ended the use of special salary levels for Puerto Rico
and the U.S. Virgin Islands, as they had become subject to the Federal
minimum wage since the Department last updated the part 541 salary
levels in 1975, and set a special salary level only for American Samoa,
which remained not subject to the Federal minimum wage.\52\ The
Department expressed its intent ``in the future to update the salary
levels on a more regular basis, as it did prior to 1975.'' \53\
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\50\ 69 FR 22169.
\51\ See id. (Table 3).
\52\ Id. at 22172.
\53\ Id. at 22171.
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In May 2016, the Department issued a final rule (the 2016 rule)
that retained the single test system and the standard duties test but
increased the standard salary level and provided for regular updating.
The 2016 rule (1) increased the standard salary level from the 2004
salary level of $455 to $913 per week, the 40th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region
(the South); \54\ (2) increased the HCE test total annual compensation
amount from $100,000 to $134,004 per year; \55\ (3) increased the
special salary level for EAP workers in American Samoa; \56\ (4)
allowed employers, for the first time, to credit nondiscretionary
bonuses, incentive payments, and commissions paid at least quarterly
towards up to 10 percent of the standard salary level; \57\ and (5)
added a mechanism to automatically update the part 541 earnings
thresholds every 3 years.\58\ The standard salary level was set at the
low end of the historical range of short test salary levels used in the
pre-2004 two-test system.\59\ The 2016 rule did not change any of the
standard duties test criteria.\60\ The 2016 rule was scheduled to take
effect on December 1, 2016.
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\54\ 81 FR 32550.
\55\ Id.
\56\ Id. at 32551.
\57\ See id.
\58\ See id. at 32550-51 (Sec. 541.602(a)(3)).
\59\ Id. at 32405 (noting the historical range of short test
salary levels was $889 to $1,231 based on an application of the
short test methodology to contemporaneous data).
\60\ Id. at 32444.
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On November 22, 2016, the U.S. District Court for the Eastern
District of Texas issued an order preliminarily enjoining the
Department from implementing and enforcing the 2016 rule.\61\ On August
31, 2017, the district court granted summary judgment to the plaintiff
challengers, holding that the 2016 rule's salary level exceeded the
Department's authority and invalidating the rule.\62\ On October 30,
2017, the Department of Justice appealed to the U.S. Court of Appeals
for the Fifth Circuit, which subsequently granted the Department's
motion to hold that appeal in abeyance while the Department of Labor
undertook further rulemaking. Following an NPRM published on March 22,
2019,\63\ the Department published a final rule on September 27, 2019
(the 2019 rule),\64\ which formally rescinded and replaced the 2016
rule.
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\61\ See Nevada v. U.S. Department of Labor, 218 F. Supp. 3d 520
(E.D. Tex. 2016).
\62\ See Nevada, 275 F.Supp.3d 795 (E.D. Tex. 2017).
\63\ See 84 FR 10900 (Mar. 22, 2019).
\64\ See 84 FR 51230.
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The 2019 rule (1) raised the standard salary level from the 2004
salary level of $455 to $684 per week, the 20th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region
(the South) and in the retail industry nationally; (2) increased the
HCE total annual compensation threshold from $100,000 to $107,432; (3)
allowed employers to credit nondiscretionary bonuses and incentive
payments (including commissions) paid at least annually to satisfy up
to 10 percent of the standard salary level; and (4) established special
salary levels for all U.S. territories.\65\ The 2019 rule did not make
changes to the standard duties test.\66\ While utilizing the same
methodology used in the 2004 rule to set the salary threshold, the
Department did not assert that this methodology constituted the outer
limit for defining and delimiting the salary threshold. Rather, the
Department reasoned the 2004 methodology was well-established,
reasonable, would minimize uncertainty and potential legal challenge,
and would address the concerns of the district court that the 2016 rule
over-emphasized the salary level.\67\ The Department acknowledged that
the new salary level was below the long test salary level used in the
pre-2004 two-test system.\68\ As in its 2004 rule, the Department
``reaffirm[ed] its intent to update the standard salary level and HCE
total annual compensation threshold more regularly in the future using
notice-and-comment rulemaking.'' \69\ The Department noted that large
gaps between rulemakings did not serve employer or employee interests
and diminished the usefulness of the salary level test, and that
regular increases promoted predictable and incremental change.\70\ The
2019 rule took effect on January 1, 2020.\71\
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\65\ The Department established special salary levels of $455
per week for Puerto Rico, Guam, the U.S. Virgin Islands, and the
CNMI (effectively continuing the 2004 salary level); it also
maintained the 2004 rule's $380 per week special salary level for
employees in American Samoa. 84 FR 51246.
\66\ See id. at 51241-43.
\67\ See id. at 51242.
\68\ Id. at 51244.
\69\ Id. at 51251.
\70\ See id. at 51251-52.
\71\ A lawsuit challenging the 2019 rule was filed in August
2022 and, at the time this proposal was drafted, remains pending in
the U.S. District Court for the Western District of Texas. Mayfield
v. U.S. Department of Labor, Case No. 1:22-cv-00792.
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C. Overview of Existing Regulatory Requirements
The part 541 regulations contain specific criteria that define each
category of exemption provided for in section 13(a)(1) for bona fide
executive, administrative, professional, and outside sales employees,
as well as teachers and academic administrative personnel. The
regulations also define exempt computer employees under
[[Page 62157]]
sections 13(a)(1) and 13(a)(17). The employer bears the burden of
establishing the applicability of any exemption from the FLSA's pay
requirements.\72\ Job titles and job descriptions do not determine
exemption status, nor does merely paying an employee a salary rather
than an hourly rate.
---------------------------------------------------------------------------
\72\ See, e.g., Idaho Sheet Metal, 383 U.S. at 209; Walling, 330
U.S. at 547-48.
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To satisfy the EAP exemption, employees must meet certain tests
regarding their job duties \73\ and generally must be paid on a salary
basis at least the amount specified in the regulations.\74\ Some
employees, such as doctors, lawyers, teachers, and outside sales
employees, are not subject to salary tests.\75\ Others, such as
academic administrative personnel and computer employees, are subject
to special, contingent earning thresholds.\76\ The standard salary
level for the EAP exemption is currently $684 per week (equivalent to
$35,568 per year), and the total annual compensation level for highly
compensated employees under the HCE test is currently $107,432.\77\ A
special salary level of $455 per week applies to employees in Puerto
Rico, Guam, the U.S. Virgin Islands, and the CNMI; \78\ a special
salary level of $380 per week applies to employees in American Samoa;
\79\ and employers can pay a special weekly ``base rate'' of $1,043 per
week to employees in the motion picture producing industry.\80\
Nondiscretionary bonuses and incentive payments (including commissions)
paid on an annual or more frequent basis may be used to satisfy up to
10 percent of the standard or special salary levels.\81\
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\73\ For a description of the duties that are required to be
performed under the EAP exemption, see Sec. Sec. 541.100 (executive
employees); 541.200 (administrative employees); 541.300,
541.303-.304 (teachers and professional employees); 541.400
(computer employees); 541.500 (outside sales employees).
\74\ Alternatively, administrative and professional employees
may be paid on a fee basis for a single job regardless of the time
required for its completion as long as the hourly rate for work
performed (i.e., the fee payment divided by the number of hours
worked) would total at least the weekly amount specified in the
regulation if the employee worked 40 hours. See Sec. 541.605.
\75\ See Sec. Sec. 541.303(d); 541.304(d); 541.500(c);
541.600(e). Such employees are also not subject to a fee basis test.
\76\ See Sec. 541.600(c) and (d).
\77\ See Sec. Sec. 541.600(a); 541.601(a)(1).
\78\ See Sec. Sec. 541.100; 541.200; 541.300.
\79\ See id.
\80\ See Sec. 541.709.
\81\ Sec. 541.602(a)(3).
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Under the HCE test, employees who receive at least $107,432 in
total annual compensation are exempt from the FLSA's overtime
requirements if they customarily and regularly perform at least one of
the exempt duties or responsibilities of an executive, administrative,
or professional employee identified in the standard tests for
exemption.\82\ The HCE test applies only to employees whose primary
duty includes performing office or non-manual work.\83\ Employees
qualifying for exemption under the HCE test must receive at least the
$684 per week standard salary portion of their pay on a salary or fee
basis without regard to the payment of nondiscretionary bonuses and
incentive payments.\84\
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\82\ Sec. 541.601.
\83\ Sec. 541.601(d).
\84\ See Sec. 541.601(b)(1); see also 84 FR 51249.
---------------------------------------------------------------------------
III. Need for Rulemaking
The goal of this rulemaking is to set effective earnings thresholds
to help define and delimit the FLSA's EAP exemption. To this end, the
Department is proposing to make appropriate increases to the standard
salary level and the HCE test's total annual compensation requirement,
apply the standard salary level to territories subject to the Federal
minimum wage, and update the special salary levels for American Samoa
and the motion picture industry. The Department is also proposing to
maintain the effectiveness of these earnings thresholds by adding a
provision to automatically update the standard salary level and the HCE
annual compensation threshold every 3 years with current wage data
(which would also have the effect of updating the levels in American
Samoa and for the motion picture industry). The updating mechanism
would also temporarily delay a scheduled automatic update if, and
while, the Department engages in notice-and-comment rulemaking to
change the salary level methodology and/or the updating mechanism.
The part 541 regulations have always included salary requirements.
From the beginning, there has been ``wide agreement'' that the amount
paid to an employee is ``a valuable and easily applied index to the
`bona fide' character of the employment for which [the] exemption is
claimed.'' \85\ Because EAP employees ``are denied the protection of
the Act,'' they are ``assumed [to] enjoy compensatory privileges''
which distinguish them from nonexempt employees, including
substantially higher pay.\86\ The Department has long recognized that
the salary level test is a useful criterion for identifying bona fide
EAP employees and providing a practical guide for employers and
employees, thus tending to reduce litigation and ensuring nonexempt
employees receive the overtime protection to which they are
entitled.\87\ The salary level test also facilitates application of the
exemption by saving employees and employers from having to apply the
more time-consuming duties analysis to a large group of employees who
do not meet the duties test.\88\ For these reasons, the salary level
test has been a key part of how the Department defines and delimits the
EAP exemption since the beginning of its rulemaking on the EAP
exemption.\89\ However, the Department has always recognized that any
salary level will result in some employees who meet the duties test but
do not earn enough to meet the salary level test, and thus are
nonexempt and therefore eligible for overtime by virtue of their
pay.\90\ This is simply a feature of a salary level test; it does not
undermine the efficacy of the salary level test but instead is taken
into account in determining where the salary level is set.
---------------------------------------------------------------------------
\85\ Stein Report at 19.
\86\ Id.; see also Report of the Minimum Wage Study Commission,
Volume IV, p. 236 (``Higher base pay, greater fringe benefits,
improved promotion potential and greater job security have
traditionally been considered as normal compensatory benefits
received by EAP employees, which set them apart from non-EAP
employees.'').
\87\ See 84 FR 51237; Weiss Report at 8.
\88\ Report and Recommendations on Proposed Revision of
Regulations, Part 541, Under the Fair Labor Standards Act, by Harry
S. Kantor, Assistant Administrator, Office of Regulations and
Research, Wage and Hour and Public Contracts Divisions, U.S.
Department of Labor (Mar. 3, 1958) (Kantor Report) at 2-3; 69 FR
22165; 84 FR 51280.
\89\ See 84 FR 51237.
\90\ See, e.g., Kantor Report at 5.
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The Department continues to believe that the amount paid to an
employee is important evidence that they are employed in a bona fide
EAP capacity, and that the salary level test ``is a vital element in
the regulations.'' \91\ The salary level test benefits employees and
employers alike, which is why--despite disagreement over the
appropriate magnitude of the part 541 earnings thresholds--an
``overwhelming majority'' of stakeholders have supported the retention
of such thresholds in prior part 541 rulemakings.\92\
---------------------------------------------------------------------------
\91\ Weiss Report at 9.
\92\ 84 FR 51235; see also Stein Report at 5, 19; Weiss Report
at 9.
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The Department's authority to set a salary level is not without
limits, and the salary test's role in defining and delimiting the scope
of the EAP exemption must allow for additional examination of employee
duties for employees whose salary exceeds the
[[Page 62158]]
salary level.\93\ Examination of duties for such employees is necessary
in part because the salaries earned by employees who do and do not
perform exempt job duties overlap. As explained in greater detail
below, the proposed standard salary level set at the 35th percentile of
weekly earnings of full-time salaried workers in the lowest-wage Census
Region ($1,059 per week, $55,068 annually) would, in combination with
the standard duties test, better identify which employees are employed
in a bona fide EAP capacity in a one-test system. By setting a salary
level above what would currently be the equivalent of the long test
salary level ($925 per week), the proposal would restore the right to
overtime pay for salaried white-collar employees who prior to the 2019
rule were always considered nonexempt if they earned below the long
test (or long test-equivalent) salary level and ensure that fewer
white-collar employees who perform significant amounts of nonexempt
work and earn between the long and short test salary levels are
included in the exemption. At the same time, by setting the standard
salary level well below what would currently be the equivalent of the
short test salary level ($1,378 per week),\94\ the proposal would
address the concerns that have been raised about excluding from the EAP
exemption too many white-collar employees solely based on their salary
level. As discussed in section IV.A.4 below, the duties test would
continue to determine exemption status for almost three-quarters of all
salaried white-collar employees subject to the part 541 regulations,
allowing employers to continue to use the exemption for 24.5 million
salaried white-collar workers who earn at least the proposed salary
level and meet the standard duties test.\95\ The proposed salary level
would also reasonably distribute between employees and their employers
what the Department now understands to be the impact of the shift from
a two-test to a one-test system on employees earning between the long
and short test salary levels.
---------------------------------------------------------------------------
\93\ 84 FR 51238 (noting salary's ``useful, but limited,
role'').
\94\ During the period from 1949 to 2004, the ratio of the short
test salary level to the long test salary levels ranged from
approximately 130 percent to 180 percent. See 81 FR 32403. The
simple average of the 15 historical ratios of the short test salary
level to the long test salary level is 149 and the Department
calculates the short test salary level as 149 percent of the long
test salary level. See id. at 32467 & n.149.
\95\ This number does not include the additional 8.1 million
workers employed in occupations that are not subject to the salary
level test, such as doctors, lawyers, and teachers. Such employees
are unaffected by this rulemaking because their exemption status is
always determined by the duties test.
---------------------------------------------------------------------------
Since switching from a two-test to a one-test system for defining
and delimiting the EAP exemption in 2004, the Department has followed
different approaches to set the single standard salary level. In 2004,
the Department set the new standard salary level roughly equivalent to
the 20th percentile of weekly earnings of full-time salaried workers in
the South and in the retail industry nationwide ($455 per week).\96\
This approach produced a salary level amount that was equivalent to the
lower long test salary level under the two-test system.\97\ Because it
was equivalent to the long test salary level, employees who
historically earned less than the long test salary level continued to
be entitled to overtime compensation because they earned below the new
standard salary level. However, because the new standard duties test
was substantially equivalent to the less rigorous short duties
test,\98\ employees who were paid the equivalent of the lower long test
salary level and who met the less rigorous short duties test also now
met the standard duties test and were not entitled to overtime
compensation. This approach broadened the EAP exemption because all
employees between the long and short test salary levels who
historically had not been considered bona fide EAP employees because
they did not meet the long duties test became exempt. The Department
followed this same methodology to set the standard salary level in
2019, although applying the 2004 rule's methodology resulted in a
salary level that was a lower amount than what would have been the
equivalent of the long test salary level.\99\ This broadened the EAP
exemption even further by, for the first time, setting a salary level
that exempted a group of white-collar employees earning below the
equivalent of the long test salary level (based on contemporaneous
data). Both the 2004 and 2019 rules thus effectively placed the impact
of the shift from a two-test to a one-test system on lower-salaried
white-collar employees--both those who earned below the short test
salary level and were traditionally protected by the more rigorous long
duties test (i.e., because they performed substantial amounts of
nonexempt work), and, in the case of the 2019 rule, those who had
previously been protected by a salary level set at or equivalent to the
long test salary.
---------------------------------------------------------------------------
\96\ See 69 FR 22168.
\97\ See id. at 22168-69.
\98\ Id. at 22214.
\99\ See 84 FR 51260 (Table 4) (showing that the salary level
derived from the Department's long test methodology would have been
$724 per week rather than the finalized $684 per week amount).
---------------------------------------------------------------------------
To address the concern that the 2004 rule did not provide overtime
compensation for lower-salaried white-collar employees performing large
amounts of nonexempt work who historically were not considered bona
fide EAP employees, in 2016 the Department set the standard salary
level at the 40th percentile of weekly earnings of full-time salaried
workers in the lowest-wage Census Region (the South), which produced a
salary level that was at the low end of the historical range of short
test salary levels.\100\ This approach restored overtime protection to
white-collar employees who perform substantial amounts of nonexempt
work and earned between the equivalent of the long test salary level
and the short test salary level. However, this approach also made
nonexempt some employees who had previously met the long duties test--
employees who earned between the long test salary level and the low end
of the short test salary range and performed only a limited amount of
nonexempt work. Until 2004 employers could use the long test to exempt
these employees, and under the 2004 rule these employees remained
exempt under the one-test system. Thus, the impact of the 2016 rule was
that employers could not use the exemption for certain white-collar
employees who earned between the long and short test salary levels and
would have met the more rigorous long duties test.\101\ In the
challenge to the 2016 rule, the district court expressed concern that
the 2016 rule conferred overtime eligibility based on salary level
alone to a substantial number of employees who would otherwise be
exempt.\102\
---------------------------------------------------------------------------
\100\ 81 FR 32405.
\101\ See 84 FR 10908; 84 FR 51242.
\102\ See Nevada, 275 F.Supp.3d. at 806.
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Having grappled with the different approaches that it has used to
set the standard salary level since switching to a one-test system in
2004, the Department's goal in this rulemaking is not only to update
the single standard salary level to account for earnings growth since
the 2019 rule, but also to build on the lessons learned in its most
recent rulemakings to more effectively define and delimit employees
employed in a bona fide EAP capacity. Consistent with its broad
authority under the statute, the Department is proposing a standard
salary level test that would work effectively with the standard duties
test to help achieve these objectives and would also reasonably
distribute the impact of the switch to a one-test system across white-
collar
[[Page 62159]]
employees earning between the long and short test salary levels and
their employers. In 2004 and 2019, setting the salary level equivalent
to or below the lower long test salary level resulted in the exemption
of lower-salaried employees who perform large amounts of nonexempt
work, in effect significantly broadening the exemption compared to
under the two-test system. This approach included in the exemption
lower-salaried employees whom the Department had long considered not to
be employed in a bona fide EAP capacity because they performed
substantial amounts of nonexempt work. Under the 2016 approach, setting
the salary level equivalent to the low end of the higher short test
salary range would have restored overtime protections to those
employees who perform substantial amounts of nonexempt work and earned
between the long test salary level and the low end of the short test
salary levels. However, it also would have resulted in denying
employers the use of the exemption for many lower-salaried employees
who traditionally were exempt under the long test, which raised
concerns that the Department was in effect narrowing the exemption
compared to the two-test system.\103\ In this rulemaking, the
Department proposes setting a standard salary level that would better
define and delimit the EAP exemption by more effectively accounting for
the switch from a two-test to a one-test system, and reasonably
distribute the impact of the shift by ensuring overtime protection for
some lower-salaried employees without excluding from exemption too many
white-collar employees solely based on their salary level.\104\
---------------------------------------------------------------------------
\103\ See 84 FR 51242.
\104\ See section IV.A.3.
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In addition, consistent with its previously stated intent, the
Department is undertaking this rulemaking to keep the earnings
thresholds up to date. Four years have passed since the 2019 rule,
during which time salaried workers in the U.S. economy have experienced
a rapid growth in their nominal wages, which lessens the effectiveness
of the current salary level threshold. Reapplying the same methodology
that was used to set the standard salary level in 2019 to recent
earnings data would result in a new threshold of $822 per week--a 20.2
percent increase over the current $684 per week standard salary
level.\105\ Applying the long test salary methodology to current data
would result in a salary threshold of $925 per week--a 35.2 percent
increase over the current salary level.
---------------------------------------------------------------------------
\105\ See section VII.C.5 (applying CPS MORG data from calendar
year 2022).
---------------------------------------------------------------------------
The Department is also proposing to increase the HCE total annual
compensation threshold to the annualized weekly earnings amount of the
85th percentile of full-time salaried workers nationally ($143,988).
Reapplying the 2019 methodology (annualized weekly earnings of the 80th
percentile of full-time salaried workers nationally) to current
earnings data results in a threshold of $125,268 per year--a 16.6
percent increase over the current threshold of $107,432. Other data
further supports that the HCE test's current total annual compensation
requirement has become outdated. When it was created in 2004, the HCE
test featured a $100,000 threshold that exceeded the annual earnings of
approximately 93.7 percent of salaried workers nationwide.\106\ More
recently in the 2019 rule, the Department set the HCE test threshold so
it would be equivalent to the annual earnings of the 80th percentile of
full-time salaried workers nationwide. Today, however, the $107,432 HCE
threshold is approximately the 72nd percentile of annual earnings of
full-time salaried workers nationwide. The Department's proposed
increase from the 80th to the 85th percentile is high enough to exclude
employees who are not ``at the very top of [the] economic ladder''
\107\ and would ensure that this test for exemption continues to serve
its intended function.
---------------------------------------------------------------------------
\106\ See 69 FR 22169 (Table 3).
\107\ Id. at 22174.
---------------------------------------------------------------------------
The salary levels applicable to the U.S. territories have not
increased since 2004. In 2004, the Department ended the use of special
salary levels in territories that had become subject to the Federal
minimum wage since the salary levels were last set in 1975, and applied
a special salary level of $380 per week only to employees in American
Samoa, who were subject to special minimum wage rates below the Federal
minimum wage.\108\ In 2019, however, the Department established a
special salary level of $455 per week for employees in Puerto Rico,
Guam, the U.S. Virgin Islands, and the CNMI, for the first time setting
a special salary level in territories that were subject to the Federal
minimum wage.\109\ The Department also maintained the special salary
level for American Samoa at $380 per week, the level set in 2004. There
is thus a compelling need to increase the salary levels applicable to
employees in U.S. territories, particularly employees in those
territories that are subject to the Federal minimum wage.
---------------------------------------------------------------------------
\108\ See id. at 22172.
\109\ See 84 FR 51246.
---------------------------------------------------------------------------
Finally, the Department proposes to adopt a mechanism to
automatically update the earnings thresholds in the part 541
regulations in future years. In its three most recent part 541
rulemakings, the Department has expressed its commitment to keeping the
salary level tests up to date. In its 2004 rule, the Department
conveyed its intent ``in the future to update the salary levels on a
more regular basis.'' \110\ In its 2016 rule, the Department adopted a
mechanism to automatically update the salary level on a triennial
basis. In 2019, after initially proposing to codify its commitment to
updating the threshold every 4 years through rulemaking, the Department
affirmed in its final rule that it ``intends to update these thresholds
more regularly in the future.'' \111\ As noted above, however, the
history of the part 541 regulations shows multiple, significant gaps
during which the salary levels were not updated and their effectiveness
in helping to define the EAP exemption decreased as wages increased.
While the Department increased its part 541 earnings thresholds every 5
to 9 years in the 37 years between 1938 and 1975, more recent decades
have included long periods without raising the salary level, resulting
in significant erosion of the real value of the threshold levels
followed by unpredictable increases. As explained in greater detail in
section IV.D, employees and employers alike would benefit from the
certainty and stability of regularly scheduled updates.
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\110\ 69 FR 22171.
\111\ 84 FR 51251-52.
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IV. Discussion of Proposed Rule
Consistent with its statutory duty to define and delimit the EAP
exemption, the Department is proposing increases to the earnings
thresholds provided in the part 541 regulations. As explained in
greater detail below, the Department proposes to increase the standard
salary level to the 35th percentile of weekly earnings of full-time
salaried workers in the lowest-wage Census Region (currently the
South). The Department also proposes to apply this updated standard
salary level to the four U.S. territories that are subject to the
Federal minimum wage--Puerto Rico, Guam, the U.S. Virgin Islands, and
the CNMI--and to update the special salary levels for American Samoa
and the motion picture industry in relation to the new standard salary
level. The Department additionally proposes raising the HCE test's
total annual compensation
[[Page 62160]]
requirement to the annual equivalent of the 85th percentile of weekly
earnings of full-time salaried workers nationally ($143,988). Finally,
the Department proposes a new mechanism to automatically update the
standard salary level and the HCE total annual compensation threshold
every 3 years to ensure that they remain effective tests for exemption.
While the primary regulatory changes proposed are in Sec. Sec.
541.600, 541.601, 541.709, and newly-added Sec. 541.607, additional
conforming changes are proposed to update references to the salary
level throughout part 541. The Department is not proposing any changes
to the salary basis or duties test requirements in this rulemaking. The
Department welcomes comments on all aspects of this proposal.
A. Standard Salary Level
The salary level test is grounded in the text of section 13(a)(1).
The Secretary's expressly-delegated authority to ``define[]'' and
``delimit[]'' the terms of the EAP exemption includes the authority to
use a salary level test as one criterion for identifying employees who
are employed in a ``bona fide executive, administrative, or
professional capacity.'' The Department has used a salary level test
since the first part 541 regulations in 1938. From the FLSA's earliest
days, stakeholders have generally favored the use of a salary
test,\112\ and the Department's authority to use a salary test has been
repeatedly upheld.\113\
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\112\ See Stein Report at 5, 19.
\113\ See, e.g., Wirtz v. Miss. Publishers Corp., 364 F.2d 603,
608 (5th Cir. 1966); Fanelli v. U.S. Gypsum Co., 141 F.2d 216, 218
(2d Cir. 1944); Walling v. Yeakley, 140 F.2d 830, 832-33 (10th Cir.
1944).
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Despite numerous amendments to the FLSA over the past 85 years,
Congress has not restricted the Department's use of the salary level
tests. Significant regulatory changes involving the salary requirements
since 1938 include adding a separate salary level for professional
employees in 1940, adopting a two-test system with separate short and
long test salary levels in 1949, and creating a single standard salary
level test and establishing a new HCE exemption test in 2004. These
changes were all made through regulations issued pursuant to the
Secretary's authority to define and delimit the exemption. Despite
having amended the FLSA numerous times over the years, Congress has not
amended section 13(a)(1) to alter these regulatory salary requirements.
The FLSA delegates to the Secretary the power to ``define[ ]'' and
``delimit[ ]'' the terms ``bona fide executive, administrative, or
professional capacity'' through regulation. Congress thus ``provided
that employees should be exempt who fell within certain general
classifications''--those employed in a bona fide executive,
administrative, or professional capacity--and authorized the Secretary
``to define and delimit those classifications by reasonable and
rational specific criteria.'' \114\ Therefore, the Department ``is
responsible not only for determining which employees are entitled to
the exemption, but also for drawing the line beyond which the exemption
is not applicable.'' \115\
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\114\ Walling, 140 F.2d at 831-32; see Ellis v. J.R.'s Country
Stores, Inc., 779 F.3d 1184, 1199 (10th Cir. 2015) (approvingly
quoting Walling); see also Auer v. Robins, 519 U.S. 452, 456 (1997)
(``The FLSA grants the Secretary broad authority to `defin[e] and
delimi[t]' the scope of the exemption for executive, administrative,
and professional employees.'').
\115\ Stein Report at 2.
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As the Department stated in its 2019 rule, an employee's salary
level ``is a helpful indicator of the capacity in which an employee is
employed, especially among lower-paid employees.'' \116\ The amount an
employee is paid is also a ``valuable and easily applied index to the
`bona fide' character of employment for which exemption is claimed,''
as well as the ``principal[ ]'' ``delimiting requirement''
``prevent[ing] abuse'' of the exemption.\117\ As the Department has
explained, if an employee ``is of sufficient importance . . . to be
classified as a bona fide'' executive employee, for example, and
``thereby exempt from the protection of the [A]ct, the best single test
of the employer's good faith in attributing importance to the
employee's services is the amount [it] pays for them.'' \118\ Employee
compensation is a relevant indicator of exemption status given that the
EAP exemption is premised on the understanding that individuals who are
employed in a bona fide executive, administrative, or professional
capacity typically earn higher salaries and enjoy other privileges to
compensate them for their long hours of work, setting them apart from
nonexempt employees entitled to overtime pay.\119\
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\116\ 84 FR 51239 (internal quotation marks omitted).
\117\ Stein Report at 19, 24; see also 81 FR 32422.
\118\ Stein Report at 19, 24; see also id. at 26 (``[A] salary
criterion constitutes the best and most easily applied test of the
employer's good faith in claiming that the person whose exemption is
desired is actually of such importance to the firm that he is
properly describable as an employee employed in a bona fide
administrative capacity.'').
\119\ See Report of the Minimum Wage Study Commission, Vol. IV,
at 236, 240; see also, e.g., Stein Report at 19 (explaining that the
``term `executive' implies a certain prestige, status, and
importance'' denoted by pay ``substantially higher than'' the
Federal minimum wage).
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Consistent with the Department's longstanding approach, the
proposed rule ensures that the salary level test and duties test
continue to complement each other to define and delimit the EAP
exemption and that the salary level does not play an outsized role in
determining whether an individual is employed in a bona fide EAP
capacity.\120\ In part because of the overlap in the salaries earned by
employees who do and do not perform exempt job duties, the salary level
must allow for appropriate examination of duties. As discussed in
section IV.A.4, under the Department's proposed standard salary level,
the duties test will determine the exemption status for most white-
collar employees.
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\120\ The Department has consistently stated that salary alone
cannot define who is a bona fide EAP employee. See 84 FR 51239; 81
FR 32429; 69 FR 22173.
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The Department's proposed standard salary level will, in
combination with the standard duties test, better define and delimit
which employees are employed in a bona fide EAP capacity in a one-test
system. By setting a salary level above the equivalent of the long test
salary level, the proposal would (unlike the 2004 and 2019 rules)
ensure that not all lower-paid white-collar employees who perform
significant amounts of nonexempt work, and were historically considered
by the Department not to be employed in a bona fide EAP capacity
because they failed the long duties test, are included in the
exemption. At the same time, by setting it well below the equivalent of
the short test salary level, the proposal would address potential
concerns that the salary level test should not be determinative of EAP
exemption status for too many white-collar employees. The combined
effect would be a more effective test for exemption. The proposed
salary level would also reasonably distribute between employees and
their employers what the Department now understands to be the impact of
the 2004 shift from a two-test to a one-test system on employees
earning between the long and short test salary levels.
1. History of the Salary Level
The first version of the part 541 regulations, issued in 1938, set
a minimum compensation requirement of $30 per week for executive and
administrative employees.\121\ Since then, the Department has increased
the
[[Page 62161]]
salary levels eight times--in 1940, 1949, 1958, 1963, 1970, 1975, 2004,
and 2019.
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\121\ 3 FR 2518.
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In 1940, the Department maintained the $30 per week salary level
for executive employees but established a higher $200 per month salary
level test for administrative and professional employees. In selecting
these thresholds, the Department used salary surveys from Federal and
State Government agencies, experience gained under NIRA, and Federal
Government salaries to determine the salary level that was a reasonable
``dividing line'' between employees performing exempt and nonexempt
work.\122\
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\122\ See Stein Report at 20-21, 31-32.
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In 1949, recognizing that the ``increase in wage rates and salary
levels'' since 1940 had ``gradually weakened the effectiveness of the
present salary tests as a dividing line between exempt and nonexempt
employees,'' the Department calculated the percentage increase in
weekly earnings from 1940 to 1949, and then adopted new salary levels
``at a figure slightly lower than might be indicated by the data'' to
protect small businesses.\123\ In 1949, the Department also established
a short test for exemption, which paired a higher salary level with a
less rigorous duties test. The justification for this short test was
that employees who met the higher salary level were more likely to meet
all the requirements of the exemption (including the 20 percent limit
on nonexempt work), and thus a ``short-cut test of exemption . . .
would facilitate the administration of the regulations without
defeating the purposes of section 13(a)(1).'' \124\ Employees who met
only the lower long test salary level, and not the higher short test
salary level, were still required to satisfy the long duties test,
which included a limit on the amount of nonexempt work that an exempt
employee could perform. The two-test system remained part of the
Department's regulations until 2004.
---------------------------------------------------------------------------
\123\ Weiss Report at 8, 14.
\124\ Id. at 22-23.
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In 1958, the Department reiterated that salary is a ``mark of [the]
status'' of an exempt employee and reinforced the importance of salary
as an enforcement tool, adding that the Department had ``found no
satisfactory substitute for the salary tests.'' \125\ To set the salary
levels, the Department considered data collected during 1955 WHD
investigations on the ``actual salaries paid'' to employees who
``qualified for exemption'' (i.e., met the applicable salary and duties
tests in place at the time) and set the salary levels at $80 per week
for executives and $95 per week for administrative and professional
employees.\126\ The Department set the long test salary levels so that
only a limited number of employees performing EAP duties (about 10
percent) in the lowest-wage regions and industries would fail to meet
the new salary level and therefore become entitled to overtime
pay.\127\ In laying out this methodology, often referred to as the
``Kantor'' methodology and generally referenced in this NPRM as the
``long test'' methodology, the Department echoed its prior comments
stating that the salary tests ``simplify enforcement by providing a
ready method of screening out the obviously nonexempt employees.''
\128\
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\125\ Kantor Report at 2-3.
\126\ Id. at 6, 9.
\127\ Id. at 6-7.
\128\ Id. at 2-3; see Weiss Report at 8.
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The Department followed a similar methodology when determining the
appropriate long test salary level in 1963, using data regarding
salaries paid to exempt workers collected in a 1961 WHD survey.\129\
The salary level for executive and administrative employees was
increased to $100 per week, and the professional exemption salary level
was increased to $115 per week.\130\ The Department noted that these
salary levels approximated the methodology used in 1958 to set the long
test salary levels.\131\
---------------------------------------------------------------------------
\129\ 28 FR 7002 (July 9, 1963).
\130\ Id. at 7004.
\131\ Id.
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The Department continued to use a similar methodology when it
updated the salary levels in 1970. After examining data from 1968 WHD
investigations, 1969 BLS wage data, and information provided in a
report issued by the Department in 1969 that included salary data for
executive, administrative, and professional employees,\132\ the
Department increased the long test salary level for executive and
administrative employees to $125 per week and increased the long test
salary level for professional employees to $140 per week.\133\
---------------------------------------------------------------------------
\132\ See 34 FR 9934, 9935 (June 24, 1969).
\133\ 35 FR 885.
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In 1975, instead of following the previous long test methodology,
the Department set the long test salary levels ``slightly below'' the
amount suggested by adjusting the 1970 salary levels for inflation
based on increases in the Consumer Price Index (CPI).\134\ The long
test salary level for executive and administrative employees was set at
$155, while the professional level was set at $170. The salary levels
adopted were intended to be interim levels ``pending the completion and
analysis of a study by [BLS] covering a six month period in 1975[,]''
and were not meant to set a precedent for future salary level
increases.\135\ The envisioned process was never completed, however,
and the ``interim'' salary levels remained unchanged for the next 29
years.
---------------------------------------------------------------------------
\134\ 40 FR 7091.
\135\ Id. at 7091-92.
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The short test salary level increased in tandem with the long test
level throughout the various rulemakings between 1949 and 2004. Because
the short test was designed to capture only those white-collar
employees whose salary was high enough to indicate a stronger
likelihood of being employed in a bona fide EAP capacity and thus
warrant a less stringent duties requirement, the short test salary
level was always set significantly higher than the long test salary
level.
When the Department updated the part 541 regulations in 2004, it
opted to create a single standard test for exemption instead of
retaining the two-test system from prior rulemakings. The Department
set the new standard salary level at $455 per week and paired it with a
duties test that was substantially equivalent to the less rigorous
short duties test. In setting the new standard salary level, the
Department looked at nonhourly earnings from the CPS MORG data
collected by BLS.\136\ The Department set a salary level that would
exclude from exemption roughly the bottom 20 percent of full-time
salaried employees in each of two subpopulations: (1) the South and (2)
the retail industry nationally. In setting the salary level the
Department looked to earnings data for all white-collar workers--exempt
and nonexempt--and looked to a higher percentile than the long test
methodology (10th percentile of exempt workers in low-wage industries
and areas). The Department acknowledged, however, that the salary
arrived at by this method was, at the time, equivalent to the salary
derived from the long test method using current data.\137\
---------------------------------------------------------------------------
\136\ See 69 FR 22166-67.
\137\ Id. at 22168. The 2004 methodology used the 20th
percentile of a data set of all full-time salaried workers and the
long test methodology looked to the lowest-paid 10 percent of exempt
salaried workers. The two methodologies resulted in equivalent
salary levels because exempt salaried workers generally have higher
earnings than nonexempt salaried workers.
---------------------------------------------------------------------------
In the 2016 rule, the Department again used CPS MORG data but set
the standard salary level equal to the 40th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region
(the South),
[[Page 62162]]
resulting in a standard salary level of $913 per week, which was at the
low end of the historic range of short test salary levels. The
Department explained that the increase in the standard salary level was
needed because the 2004 rule exempted lower-salaried employees
performing large amounts of nonexempt work who should be covered by the
overtime compensation requirement.\138\ Since the standard duties test
was equivalent to the short duties test, the Department asserted that a
salary level in the short test salary range was necessary to address
this effect of the 2004 rule. As explained earlier, the U.S. District
Court for the Eastern District of Texas held the 2016 rule invalid.
---------------------------------------------------------------------------
\138\ 81 FR 32405.
---------------------------------------------------------------------------
In updating the standard salary level in 2019, the Department
reapplied the methodology from the 2004 rule, setting the salary level
equal to the 20th percentile of weekly earnings of full-time salaried
workers in the South and in the retail sector nationwide.\139\ This
methodology addressed concerns that had been raised that the 2016
methodology excluded too many employees from the exemption based on
their salary alone. Unlike in 2004, however, where the 20th percentile
of weekly earnings of full-time salaried workers in the South and
retail nationally was essentially the same as the long test, this
methodology now produced a salary level amount that was lower than the
equivalent of the long test salary level using contemporaneous data.
This methodology produced the current standard salary level of $684 per
week (equivalent to $35,568 per year).\140\
---------------------------------------------------------------------------
\139\ See 84 FR 51260 (Table 4).
\140\ Id. at 51238.
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2. Salary Level Test Function and Effects
Since 1940, the Department's regulations have consistently looked
at both the duties performed by the employee and the salary paid by the
employer in defining and delimiting who is a bona fide executive,
administrative, or professional employee exempt from the FLSA's minimum
wage and overtime protections. From 1949 to 2004, the Department
determined EAP exemption status using a two-test system comprised of a
long test (a lower salary level paired with a more rigorous duties test
that limited performance of nonexempt work to no more than 20 percent
for most employees) and a short test (a higher salary level paired with
a less rigorous duties test that looked to the employee's primary
duties and did not have a numerical limit on the amount of nonexempt
work). The two-test system facilitated the determination of whether
white-collar workers across the income spectrum were employed in a bona
fide EAP capacity, and employees who met either test could be
classified as EAP exempt.
In a two-test system, the long test salary level screens from the
exemption the lowest-paid white-collar employees, thereby ensuring
their right to overtime compensation. The Department has often referred
to many of the employees who are screened from the exemption by virtue
of their earning below the lower long test salary level as ``
`obviously nonexempt employees[.]' '' \141\ The long test salary level
helped distinguish employees who were not employed in a bona fide EAP
capacity because the Department found that employees who were screened
from exemption by the long test salary level generally did not meet the
other requirements for exemption.\142\ Since 1958, the long test salary
level was generally set to exclude from exemption approximately the
lowest-paid 10 percent of salaried white-collar employees who performed
EAP duties in the lowest-wage regions and industries.\143\ The long
test salary level also served as a line delimiting the population of
white-collar employees for whom the duties test determined their
exemption status. In the two-test system, this duties analysis included
an examination of the amount of nonexempt work performed, which ensured
that employees earning lower salary levels were, in fact, employed in a
bona fide EAP capacity by limiting the amount of time they could spend
on nonexempt work. Thus, the Department long recognized that lower
salaried workers should be subject to a test that placed significant
limits on the amount of nonexempt work they perform. The duties and
salary level tests worked in tandem to properly define and delimit the
exemption: lower-paid workers had to satisfy a more rigorous duties
test with strict limits on nonexempt work; higher paid employees were
subject to a less rigorous duties test because they were more likely to
satisfy all the requirements of the exemption (including the limit on
nonexempt work).\144\
---------------------------------------------------------------------------
\141\ See id. at 51237 (quoting Kantor Report at 2-3).
\142\ See Kantor Report at 2-3; Weiss Report at 8 (``In an
overwhelming majority of cases, it has been found by careful
inspection that personnel who did not meet the salary requirements
would also not qualify under other sections of the
regulations[.]'').
\143\ See 84 FR 51236.
\144\ Weiss Report at 22-23.
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Because employees who met the short test salary level were paid
well above the long test salary level, the short test salary level did
not perform the same function as the long salary level of screening
obviously nonexempt employees. Instead, the short test salary level was
used to determine whether the full duties test or the short-cut duties
test would be applied to determine EAP exemption status. The exemption
status of employees paid more than the long and less than the short
test salary levels was determined by applying the more rigorous long
duties test that ensured overtime protections for employees who
performed substantial amounts of nonexempt work. The exemption status
of employees paid at or above the higher short test salary level was
determined by the less rigorous short duties test that looked to the
employee's primary duty and did not cap the amount of nonexempt work an
employee could perform. The short test thus provided a faster and more
efficient duties test based on the Department's experience that
employees paid at the higher short test salary level ``almost
invariably'' met the more rigorous long duties test, including its 20
percent limit on nonexempt work, and therefore a shortened analysis of
duties was a more efficient test for exemption status.\145\
---------------------------------------------------------------------------
\145\ Id.
---------------------------------------------------------------------------
In 2004, rather than update the two-test system, the Department
chose to establish a new single-test system for determining exemption
status. The new single standard test for exemption used a duties test
that was substantially equivalent to the less rigorous short duties
test in the two-test system.\146\ Since the creation of the standard
test, the Department has taken two different approaches to set the
standard salary level that pairs with the standard duties test.
---------------------------------------------------------------------------
\146\ 69 FR 22214.
---------------------------------------------------------------------------
In 2004, as noted above, the Department set the new salary level
roughly equivalent to the 20th percentile of weekly earnings of full-
time salaried workers in the South and in the retail industry
nationwide.\147\ The Department acknowledged that the salary level
($455 per week) was, in fact, equivalent to the lower long test salary
level amount under the two-test system using contemporaneous data.\148\
Because it was equivalent to the long test salary level, the standard
salary test continued to perform the same initial screening function as
the long test salary level and employees who historically were entitled
to overtime compensation
[[Page 62163]]
because they earned below the long test salary level remained nonexempt
under the new standard test. Without a higher salary short test,
however, all employees who met the standard salary level were subject
to the same duties test. The single standard duties test was equivalent
to the short duties test, and so some employees who previously did not
meet the long duties test met the standard duties test. As a result,
the shift from a two-test to a one-test system significantly broadened
the EAP exemption because employees who historically had not been
considered bona fide EAP employees--in particular, those lower-paid
employees who did not meet the long duties test because they performed
substantial amounts of nonexempt work--were now defined as falling
within the exemption and would not be eligible for overtime
compensation.
---------------------------------------------------------------------------
\147\ See id. at 22168-69.
\148\ See id.
---------------------------------------------------------------------------
This broadening specifically impacted lower-paid, salaried white-
collar employees who earned between the long and short test salary
levels and performed substantial amounts of nonexempt work. Under the
two-test system, these employees had been entitled to overtime
compensation if their nonexempt duties exceeded the long test's strict
limit on such work. Under the 2004 standard test, these employees
became exempt because they met both the low standard salary level and
the less rigorous standard duties test. The Department's discussion of
the elimination of the long duties test in 2004 focused primarily on
the minimal role played by the long test at that time due to the
erosion of the long salary level, and on the difficulties employers
would face if they were again required to track time spent on nonexempt
work when the dormancy of the long duties test meant that they had
generally not been performing such tracking for many years.\149\ While
asserting that employees who were then subject to the long test would
be better protected under the higher salary level of the new standard
test, the Department did not compare the protection lower salaried
employees would receive under the standard test with the protection
they would have received under an updated long test with a salary level
based on contemporary data and the existing long duties test.
---------------------------------------------------------------------------
\149\ See 69 FR 22126-27.
---------------------------------------------------------------------------
To address the concern that lower-salaried employees performing
large amounts of nonexempt work historically were not considered bona
fide EAP employees and thus should be entitled to overtime
compensation, in 2016 the Department set the standard salary level at
the 40th percentile of weekly earnings of full-time salaried workers in
the lowest-wage Census Region (the South). This methodology produced a
salary level ($913 per week) that was at the low end of the historical
range of short test salary levels.\150\ This approach restored overtime
protection for employees performing substantial amounts of nonexempt
work who earned between the long and short test salary levels, as they
failed the new salary level test. However, this approach generated
potential concerns that the salary level test should not be
determinative of exemption status for too many individuals.
---------------------------------------------------------------------------
\150\ 81 FR 32405.
---------------------------------------------------------------------------
Due to the 2016 rule's narrowing of the exemption, employers were
unable to use the exemption for employees who earned between the long
test salary level and the low end of the short test salary range and
would have met the more rigorous long duties test. Prior to 2004
employers could use the long test to exempt these employees, and under
the 2004 rule these employees remained exempt under the one-test
system. Thus, while the 2016 rule accounted for the absence of the long
duties test by restoring overtime protections to employees earning
between the long test salary level and the low end of the short test
salary range who perform significant amounts of nonexempt work, it also
made a group of employees who had been exempt under the two-test system
newly nonexempt under the one-test system: employees earning between
the long test level and the short test salary range who perform only
limited nonexempt work.
In its 2019 rule, the Department determined that the 2016 rule had
not sufficiently considered the impact of the increased standard salary
level on employers' ability to use the exemption for this group of
employees.\151\ The Department emphasized that ``[f]or most . . .
employees the exemption should turn on an analysis of their actual
functions, not their salaries,'' and that the 2016 rule's effect of
making nonexempt all lower-paid, white-collar employees who
traditionally were exempt under the long test ``deviated from the
Department's longstanding policy of setting a salary level that does
not `disqualify[ ] any substantial number of' bona fide executive,
administrative, and professional employees from exemption.'' \152\ To
address these concerns, the Department simply returned to the 2004
rule's methodology for setting the salary threshold. In responding to
comments that the proposed salary level did not account for the absence
of the more rigorous long duties test, the 2019 rule reiterated the
statements made in the 2004 rule and asserted that the 2016 rule did
not adequately account for the absence of the lower long test salary
level.\153\ Applying the 2004 method to the earnings data available in
2019 produced a standard salary level of $684 per week, which was even
below the equivalent of what the long test salary level would have been
using contemporaneous data ($724 per week).\154\
---------------------------------------------------------------------------
\151\ 84 FR 10908.
\152\ Id. (quoting Kantor Report at 5).
\153\ See 84 FR 51243.
\154\ Id. at 51260.
---------------------------------------------------------------------------
The 2019 rule thus had the same impact as the 2004 rule of
exempting all employees who earned between the long and short test
salary levels and who performed too much nonexempt work to meet the
long duties test, but passed the short duties test. The 2019 rule also
for the first time permitted the exemption of a group of low-paid
white-collar employees (those earning between $684 and $724 per week)
who had always been protected by the salary level test's initial
screening function--either under the long test, or under the 2004 rule
salary level that was equivalent to the long test salary level. The
Department stated that the standard salary level's ``fairly small
difference'' from the long test level did not justify using the long
test methodology to set the salary level, and emphasized that its
approach preserved the salary level's principal function as a tool for
screening from exemption obviously nonexempt employees.\155\ In
response to commenter concerns about the rule exempting employees who
traditionally earned between the long and short test salary levels and
received overtime compensation because they did not meet the long
duties test, the Department cited the legal risks posed by the 2016
methodology (as evidenced by the district court's decisions) and
explained that such employees were already exempt in the years leading
up to 2004 because the Department's outdated salary levels had rendered
the long test with its more rigorous duties requirement largely
dormant.\156\ As in the 2004 rule, the Department did not address the
protection lower salaried employees would have received under the long
test with an updated salary level based on contemporary data.
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\155\ Id. at 51244.
\156\ Id. at 51243.
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The Department's experience with a one-test system shows that it is
less nuanced than the two-test system,
[[Page 62164]]
which allowed for finer calibration in defining and delimiting the EAP
exemption. In a two-test system, there are four variables (two salary
levels and two duties tests) that can be adjusted to define and delimit
the exemption. In a one-test system, there are only two variables (one
salary level and one duties test) that can be adjusted, necessarily
yielding less nuanced results. The loss in precision does not impact
the lowest-paid white-collar employees, who were screened from
exemption by the long test salary level, because they maintain their
right to overtime pay so long as the standard salary level is set at
least equivalent to the lower long test salary level--a condition that
was met by the 2004 rule's salary level but not by the 2019 rule's
salary level. Instead, the Department's experience shows that the shift
from a two-test system to a one-test system impacts employees earning
between the long and short test salary levels and, in turn, employers'
ability to use the exemption for these employees.
In the two-test system, employees who earned between the long and
short test salary levels and performed large amounts of nonexempt work
were protected by the long duties test, while bona fide EAP employees
who performed only limited amounts of nonexempt work in that earnings
range were exempt. Meanwhile, the short test provided a time-saving
short-cut test for higher-earning employees who would almost invariably
pass the more rigorous, and thus more time consuming, long duties test.
But the more rigorous long duties test, with its limitation on the
amount of nonexempt work that could be performed, was always core to
the two-test system, with the higher short test salary level and less
rigorous short duties test serving as a time-saving mechanism for
employees who would likely have met the more rigorous long duties test.
Upon reflection and based on its rulemakings over the past 20
years, the Department has determined that a one-test system that uses
the standard duties test, without its limitations on the amount of
nonexempt work, must use a salary level above the long test salary
level in order to ensure that it is effectively identifying bona fide
EAP employees. A single test system cannot fully replicate both the
two-test system's heightened protection for employees performing
substantial amounts of nonexempt work and its increased efficiency for
determining exemption status for employees who are highly likely to
perform EAP duties. One way in a one-test system to protect lower-
salaried employees earning between the long and short test salary
levels who were historically entitled to overtime compensation under
the long test would be to reinstate the long duties test with its
limitation on nonexempt work. A one-test system with a more rigorous
duties test would appropriately emphasize the important role of duties
in determining exemption status. However, for the reasons discussed in
this section, the Department is not proposing in this rulemaking to
replace the standard duties test with the long duties test or to return
to a two-test system with the long duties test. The Department has not
had a one-test system with a limit on nonexempt work other than from
1940 to 1949,\157\ when the Department replaced this approach with its
two-test system, and returning to it would eliminate the benefits of
the current duties test, including having a single test with which
employers and employees are familiar.
---------------------------------------------------------------------------
\157\ See 5 FR 4077.
---------------------------------------------------------------------------
In light of these considerations, the Department's goal in this
rulemaking is not only to update the single standard salary level to
account for earnings growth since the 2019 rule, but also to build on
the lessons learned in its most recent rulemakings to more effectively
define and delimit employees working in a bona fide EAP capacity.
Consistent with its broad authority under section 13(a)(1), the
Department is proposing a single salary level test that will work
effectively with the standard duties test to better define who is
employed in a bona fide EAP capacity and will both perform the initial
screening function that the salary level has always played and also
adjust the salary level to account for the change to a single test
system.
3. Salary Level Methodology
The Department's extensive regulatory history shows that the two-
test system for defining the EAP exemption is an effective method of
determining the exemption status of white-collar employees at both
lower and higher salary levels. With this system, the salary and duties
components of each test balance each other and the two tests work in
combination to efficiently identify exempt employees while protecting
employees who should receive overtime compensation. Although the two-
test system's effectiveness diminished in its later years, this was a
consequence of the Department's failure to update the salary level
tests after 1975, not a flaw with the two-test structure itself. Not
updating the salary levels in a two-test system is particularly
problematic because the real value of the higher short test salary
level will inevitably decrease, expanding the exemption to lower-paid
white-collar employees who previously were not considered bona fide EAP
employees because they did not meet the long duties test and earned
below the short test salary level, and rendering the lower long test
salary level, with its more rigorous duties requirements, less
effective in differentiating between exempt and nonexempt employees.
The Department has considered returning to the two-test system as a
way to define and delimit the EAP exemption without incurring the
precision-related challenges inherent in a one-test system. However,
the Department believes that a one-test system, with a single duties
test, benefits both employers and employees in terms of the increased
efficiency and simplicity in application. As the Department explained
in 2004, a two-test system, with the more rigorous long duties test
determining exemption status for many employees, would make exemption
status determinations more complex and less efficient than retaining a
single-test system with the existing duties test.\158\ The Department
also continues to be mindful of the post-1991 regulatory landscape,
which remains highly relevant given that the two-test system
effectively became a one-test system in 1991 when the Federal minimum
wage equaled or surpassed the long test salary levels.\159\
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\158\ See 69 FR 22126-27; see also 81 FR 32444-45 (discussing
widespread employer and employee stakeholder opposition to
reinstating a two-test system).
\159\ 84 FR 51243.
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The Department has also considered whether to propose changing the
standard duties test in this rulemaking. A test requiring closer
scrutiny of employee duties would be consistent with the statutory
text, and a credible way to define the exemption.\160\ Indeed, a more
rigorous duties test, which limited the amount of nonexempt work--the
long duties test--was traditionally the core of the EAP exemption in
the two-test system. Experience under the two-test system shows that a
more rigorous duties test helps to ensure that exempt employees are in
fact performing EAP duties and
[[Page 62165]]
are therefore employed in a bona fide EAP capacity.\161\ In this
respect, the duties test allows for finer calibration than the salary
level test when determining who is employed in a bona fide EAP
capacity, with a rigorous duties test that limits the amount of
nonexempt work that can be performed ensuring that employees are
actually performing EAP work and not simply performing nonexempt work
without receiving overtime compensation. Were the Department to lessen
the salary level test's role by adopting a more rigorous duties test,
the number of employees who are nonexempt based on their salary alone
would decrease, helping alleviate concerns about the salary level
``supplanting an analysis of an employee's job duties'' in too many
instances.\162\ The Department could, for instance, return to a duties
test that explicitly limited the amount of nonexempt work that could be
performed. As discussed above, a limitation on nonexempt work was an
integral part of the long duties test that was, for a long time, a
critical component of the test for EAP exemption.
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\160\ See 81 FR 32446 (``The Department continues to believe
that, at some point, a disproportionate amount of time spent on
nonexempt duties may call into question whether an employee is, in
fact, a bona fide EAP employee.''); see also Stein Report at 17
(noting that ``it would be inconsistent with the purposes of the
[FLSA]'' to exempt employees like working foremen). In the 2004
rule, the Department explained that eliminating the salary level
test entirely would require significant changes to the duties test.
See 69 FR 22172.
\161\ The importance of a rigorous duties test was illustrated
by the Department's Burger King litigation in the early 1980s, when
the short and long tests were still actively in use. The Department
brought two actions arguing that Burger King assistant managers were
entitled to overtime protection. Sec'y of Labor v. Burger King
Corp., 675 F.2d 516 (2d Cir. 1982); Sec'y of Labor v. Burger King
Corp., 672 F.2d 221 (1st Cir. 1982). One group of assistant managers
satisfied the higher short test salary level and was therefore
subject to the less rigorous short duties test; the other group was
paid less and was therefore subject to the long duties test with its
limit on nonexempt work. Both appellate courts found that the higher
paid employees were not overtime protected--even though they
performed substantial amounts of nonexempt work--because they
satisfied the short duties test. The lower-paid employees, however,
were not exempt and therefore entitled to overtime compensation
because they did not meet the more rigorous long duties test.
\162\ 275 F. Supp. 3d at 806.
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The Department has ultimately decided, however, not to propose any
changes to the duties test, consistent with its decisions in the 2016
and 2019 rules. This decision was also informed by the Department's
experience when it established the single-test system in 2004. In that
rulemaking, the Department initially considered substantive changes to
the duties test,\163\ but ultimately declined to go through with most
of the proposed changes, stating that the final standard duties test
was substantially the same as the short duties test.\164\ The
Department also considered changing the duties test in both the 2016
and 2019 rulemakings, but ultimately chose not to propose any such
changes.\165\
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\163\ See 68 FR 15564-68.
\164\ 69 FR 22126, 22192-94.
\165\ 84 FR 10904; 82 FR 34618 (July 26, 2017); 80 FR 38543
(July 6, 2015).
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At this time, the Department favors keeping the current duties test
and concludes that, paired with an appropriate salary level
requirement, the test can appropriately distinguish bona fide EAP
employees from nonexempt workers. While comments received in previous
rulemakings and during listening sessions show that the standard duties
test is not universally popular, it is well known to employers,
employees, and the courts, making it easier and more efficient for
employers to implement and for workers to understand. Substantive
changes to the duties test are a possible way to revise the regulatory
test but they would take more time for employers and employees to
adjust to than an increase in the salary level, requiring employers to
reassess their current exemption determinations.
i. Fully Restoring the Salary Level's Screening Function
To determine the appropriate salary level, the Department first
considers whether the present methodology adequately performs the
historical screening function of the long test salary level and next,
the extent to which the salary level must be increased above the long
test salary level to account for the switch to a one-test system in
2004.
The Department first focused on the salary level's historic
function of screening obviously nonexempt employees from the exemption,
a ``principle [that] has been at the heart of the Department's
interpretation of the EAP exemption for over 75 years.'' \166\ Under
the two-test system, the lower long test salary level provided ``a
ready method of screening out the obviously nonexempt employees, making
an analysis of duties in such cases unnecessary.'' \167\ When the
Department updated the long test in 1958, it reaffirmed the long test
salary's function as a screening tool.\168\
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\166\ See 84 FR 51241.
\167\ Weiss Report at 8.
\168\ Kantor Report at 2-3.
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When the Department moved to a one-test system, the standard salary
test had to perform the initial screening function that the long test
salary level performed in the two-test system. In the 2004 rule, the
Department reaffirmed its historical statements emphasizing the salary
level's critical screening function.\169\ Most significantly, the
Department used the long test methodology to validate its new salary
level of $455 per week. Even though the 2004 rule made certain changes
from that methodology (most significantly, setting the salary level
equivalent to the ``lowest 20% of all salaried employees'' instead of
the ``lowest 10% of exempt salaried employees''), the Department
stressed that both ``approaches are capable of reaching exactly the
same endpoint'' and demonstrated that the new method and the long test
method produced equivalent salary levels at the time.\170\ By setting a
salary level equivalent to the long test level, the Department ensured
that employees earning at levels whereby they were entitled to overtime
compensation under the two-test system because they earned below the
long test salary level remained screened from the exemption by the new
standard salary test, regardless of whether they met the less rigorous
standard duties test. In the 2004 rule, the Department rejected
requests from commenters who supported a salary level that was $30 to
$95 lower than the level the Department ultimately adopted,\171\ thus
maintaining the historic screening function by declining to set a
salary level lower than the long test level.
---------------------------------------------------------------------------
\169\ 69 FR 22165.
\170\ See id. at 22167-71 (showing that for all full-time
salaried employees, $455 in weekly earnings corresponded to just
over the 20th percentile in the South and the 20th percentile in
retail, and that for employees performing EAP duties, $455 in weekly
earnings corresponded to just over the 8th percentile in the South
and the 10th percentile in retail).
\171\ See id. at 22164.
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In its 2019 rule, the Department reemphasized the salary level's
screening function.\172\ The Department distinguished the 2016 rule,
which the Department explained was invalidated because it ``
`untethered the salary level test from its historical justification' of
`[s]etting a dividing line between nonexempt and potentially exempt
employees' by screening out only those employees who, based on their
compensation level, are unlikely to be bona fide executive,
administrative, or professional employees.'' \173\ In contrast, the
Department explained, reapplying the 2004 methodology to current data
was likely to pass muster because the district court that invalidated
the 2016 rule ``endorsed the Department's historical approach to
setting the salary level'' and ``explained that setting `the minimum
salary level as a floor to screen[ ] out the obviously nonexempt
[[Page 62166]]
employees' is `consistent with Congress's intent.' '' \174\
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\172\ 84 FR 51237 (internal quotation marks omitted).
\173\ Id. at 51231 (quoting 84 FR 10901).
\174\ Id. at 51241 (quoting 275 F. Supp.3d at 806).
---------------------------------------------------------------------------
The Department's position remains that a core function of the
salary level test is to screen from the EAP exemption employees who,
based on their low pay, should receive the FLSA's overtime protections.
For decades under the Department's two-test system, the long test
salary level performed this screening function. In the 2004 rule, the
Department used a different approach--setting a single salary level
test that was equivalent to, and thus set the same line of demarcation
as, the long test salary level (although it combined that salary level
with a duties test that was equivalent to the less rigorous short
duties test). The Department deviated from this approach in 2019,
setting a salary level that was $40 per week below the level produced
using the long test methodology.\175\ In doing so, the Department for
the first time expanded the exemption to include employees who were
paid below the long test salary level. As an initial step, the proposed
salary level methodology must fully restore the salary level's
screening function by ensuring that employees who were nonexempt
because they earned less than the long test salary are also nonexempt
under the standard test. Simply restoring the historic screening
function would require a standard salary level amount that is at least
equal to the long test level (which is $925 per week using current
data). Such a salary level would not, however, account for the shift to
a one-test system in 2004.
---------------------------------------------------------------------------
\175\ Id. at 51244.
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Increasing the standard salary level to at least the long test
level would ensure that the salary level, at a minimum, performs the
historical screening function it would have performed in a two-test
system. From 1938 to 2019, all salaried white-collar employees paid
below the long test salary level were entitled to the FLSA's
protections, regardless of the duties they performed. This was true
from 1938 to 1949 under the salary level test that became the long
test,\176\ from 1949 to 2004 under the long test, and from 2004 to 2019
under the standard salary level test that was set equivalent to the
long test level. Setting the salary level below the long test level as
was done in the 2019 rule--because the 2004 methodology no longer
matched the long test salary level based on contemporaneous data--
departed from this history by enlarging the exemption to newly include
employees who earned less than the long test salary level.
---------------------------------------------------------------------------
\176\ During this period the Department used a one-test system
that paired a lower salary level with a more rigorous duties test.
See, e.g., 5 FR 4077.
---------------------------------------------------------------------------
In the 2019 rule, the Department expressly declined to use the long
test methodology to set the salary level test.\177\ Because the
Department is not using the long test methodology to set the salary
level in this proposal, but is instead using it to inform its selection
of a new salary level methodology, the concerns expressed by the
Department in 2019 do not apply. The Department was in part worried
that the long test method is ``complex to model and thus is less
accessible and transparent.'' \178\ This concern does not arise here
because the Department's proposed methodology uses a publicly available
data set of all full-time nonhourly workers in the South to set the
salary level, as opposed to the long test methodology data set (which
only included exempt workers).\179\ In 2019, the Department also
expressed concern that the long test methodology presents a
``circularity problem'' because this approach ``would determine the
population of exempt salaried employees, while being determined by the
make-up of that population.'' \180\ This concern is similarly not
implicated here because, consistent with its practice since 2004, the
Department is setting the salary level using a data set of all full-
time nonhourly workers, not just exempt workers.
---------------------------------------------------------------------------
\177\ 84 FR 51244, 51260.
\178\ Id. at 51244.
\179\ For the same reason, the Department's approach does not
implicate concerns that applying the long test method ``requires
`uncertain assumptions' '' to compile a dataset set that represents
exempt EAP employees. Id. (quoting 69 FR 22167). Moreover, while it
is true that the Department must apply its probability codes to
determine the group of salaried employees who pass the duties test,
the Department has consistently applied these codes since the 2004
rule. See generally section VII.B.5 (discussing probability codes).
\180\ 84 FR 51244 (quoting 69 FR 22167).
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ii. Selecting the Proposed Salary Level Methodology
Section 13(a)(1)'s broad grant of statutory authority for the
Department to define and delimit the EAP exemption provides the
Department a degree of latitude in determining an appropriate salary
level for identifying individuals who are employed in a bona fide EAP
capacity. The Department believes that the long and short test salary
levels provide useful parameters informed by its historical rulemaking
for determining how to update the salary level test in this rulemaking.
As previously discussed, the long and short test salary levels have
served as the foundation for nearly all of the Department's prior
rulemakings, either directly under the two-test system, or indirectly
as a means of evaluating the Department's salary level methodology
under a one-test system. Based on 2022 data, applying the long test
methodology produces a salary level of $925 per week ($48,100 per year)
and the short test methodology produces a salary level of $1,378 per
week ($71,656 per year).
The long and short test salary levels reflected longstanding
understandings of how an individual's salary level informs the question
of whether an individual is employed in a bona fide EAP capacity. As
noted above, the long test salary level helped distinguish employees
who were not employed in a bona fide EAP capacity and the Department
found that employees who were screened from exemption by the long test
salary level generally did not meet the other requirements for
exemption.\181\ The justification for the short test, on the other
hand, was that employees who met the higher salary level were more
likely to meet all the requirements of the exemption (including the
long test's 20 percent limit on nonexempt work).\182\ Moreover, because
the Department's rulemakings since 2004 have, to varying extents, used
the long and short tests as guideposts for setting the salary level in
a one-test system, maintaining the same orientation in this rulemaking
would enable the Department to calibrate its methodology to better
define and delimit bona fide EAP employees, and evaluate how it impacts
employees who historically have been entitled to overtime compensation
and the ability of employers to use the exemption to exclude from
overtime protection employees who have historically been exempt.
---------------------------------------------------------------------------
\181\ See Kantor Report at 2-3.
\182\ Weiss Report at 22-23.
---------------------------------------------------------------------------
In its almost 20 years of experience with the one-test system, the
Department has never set a standard salary level that falls between the
long test salary level and the short test range. As explained more
fully above, the Department set the standard salary at (or below) the
long test salary level in the 2004 and 2019 rules and set it at the low
end of the historic range of short test salary levels in the 2016 rule.
Setting the salary level at either the long test salary level or
equivalent to a short test salary level in a one-test system with the
standard duties test, however, results in either denying overtime
protection to lower-paid employees who are performing large amounts of
nonexempt work, and thus, were exempt under the Department's historical
view of the EAP
[[Page 62167]]
exemption, or in raising concerns that the salary level is determining
the status of too many employees. An appropriately calibrated salary
level between the long and short test salary levels would better define
and delimit which employees are employed in a bona fide EAP capacity,
and thus better fulfill the Department's duty to define and delimit the
EAP exemption.
Traditionally, the Department considered employees earning between
the long and short test salary levels to be employed in a bona fide EAP
capacity only if they were not performing substantial amounts of
nonexempt work. With the adoption of a duties test based on the less
rigorous short duties test, the shift to a single-test system
eliminated the inquiry into the amount of nonexempt work employees
performed. Following this shift, the Department has taken two
approaches to setting the salary level to pair with the standard duties
test. The approach taken in the 2004 rule permitted the exemption of
all employees earning above the long test salary level who met the
standard duties test--including many employees who performed
substantial amounts of nonexempt work and were protected by the long
duties test. The approach taken in the 2016 rule was challenged and
criticized as making nonexempt employees earning between the long test
salary level and the low end of the short test salary range--including
some employees who may have performed very little nonexempt work and
would have been exempt under the long test. Inevitably, any attempt to
pair a single salary level with the current duties test will result in
some employees who perform substantial amounts of nonexempt work being
exempt, and some employees who perform almost exclusively exempt work
being nonexempt.\183\ But such a result is inherent in setting any
salary level in a one test system--some employees will have EAP status
turn on salary level. The proposed salary level would better identify
which employees are employed in a bona fide EAP capacity--particularly
by restoring overtime eligibility for individuals who perform
substantial amounts of nonexempt work and historically would have been
protected by the long duties test--while at the same time addressing
potential concerns that the salary level test should not be
determinative of exemption status for too many individuals.\184\
---------------------------------------------------------------------------
\183\ See Stein Report at 6 (``In some instances the rate
selected will inevitably deny exemption to a few employees who might
not unreasonably be exempted, but, conversely, in other instances it
will undoubtedly permit the exemption of some persons who should
properly be entitled to benefits of the act.'').
\184\ The Department has repeatedly recognized that increasing
salary level tends to correlate with the performance of bona fide
EAP duties. See section IV.A.2 (discussing role of long test and
short test salary levels); section IV.C (discussing the role of the
HCE total annual compensation threshold). Thus, increasing overtime
protection specifically for workers earning at the lower end of the
range between the long test salary level and short test salary
level--but not those earning at the higher end of that range--is an
especially appropriate approach to balancing these concerns.
---------------------------------------------------------------------------
In setting the salary level, the Department continues to believe
that it is important to use a methodology that is transparent and
easily understood. As in its prior rulemakings, the Department proposes
to set the salary level using a lower-salary regional data set (as
opposed to nationwide data) to accommodate businesses for which
salaries generally are lower due to geographic or industry-specific
reasons.\185\ Specifically, the Department proposes to set the salary
level using the data set of full-time nonhourly \186\ workers in the
lowest-wage Census Region (the South). Like the Department's 2004,
2016, and 2019 rules, this approach would promote transparency because
BLS routinely compiles this data. It would also promote regulatory
simplification because the data set is not limited to exempt EAP
employees and thus does not require the Department to model which
employees pass the duties test.\187\
---------------------------------------------------------------------------
\185\ See 84 FR 51238; 81 FR 32404.
\186\ Consistent with recent rulemakings, in determining
earnings percentiles the Department looked at nonhourly earnings for
full-time workers from the CPS MORG data collected by BLS.
\187\ As discussed in the economic analysis, see section
VII.B.5, this modeling is done using the Department's probability
codes. See 84 FR 51244; 69 FR 22167.
---------------------------------------------------------------------------
For similar reasons, the Department is not proposing to add
nationwide earnings data from specific industries (such as retail) to
the CPS earnings data from the lowest-wage Census Region. The
Department's 2019 rule included such data to faithfully replicate the
2004 methodology which considered earnings of full-time nonhourly
workers in the lowest-wage Census Region and the retail industry
nationally.\188\ The Department's approach nonetheless would yield a
salary level that would be appropriate in low-wage industries because
using earnings data from the lowest-wage Census Region would capture
differences across regional labor markets without attempting to adjust
to specific industry conditions.\189\
---------------------------------------------------------------------------
\188\ See 84 FR 51244 (citing 69 FR 22167).
\189\ See 81 FR 32410.
---------------------------------------------------------------------------
Based on 2022 data, applying the long test methodology produces a
salary level of $925 per week ($48,100 per year), which equates to
between the 26th and 27th percentiles of weekly earnings of full-time,
nonhourly workers in the lowest-wage Census Region (the South).\190\
This figure provides what the Department believes should be the lowest
boundary of a salary level methodology because it would at least
restore the historical screening function that had operated under a
two-test system.
---------------------------------------------------------------------------
\190\ The 26th percentile in this data set corresponds to a
salary level of $918 per week and the 27th percentile corresponds to
a salary level of $933 per week.
---------------------------------------------------------------------------
The Department is not proposing to set the salary level equivalent
to the long test level in part because doing so would perpetuate the
problem that has become evident under the 2004 and 2019 rules: that
setting the single salary level no higher than the long test level
enables employers to exempt employees who were traditionally not
considered bona fide EAP employees because they performed substantial
amounts of nonexempt work and did not meet the long duties test under
the two-test system. Like these earlier rules, this approach would
impact white-collar employees earning between the long and short test
salary levels who perform substantial amounts of nonexempt work--and
thus were entitled to overtime protection under the two-test system--
but meet the less rigorous standard duties test.
As discussed above, the Department could address this issue by
changing the duties test to reinstate the long test's limit on
nonexempt work. Doing so would restore the relationship between the
salary level and duties tests that existed under the two-test system
whereby the Department paired a lower salary level with a more rigorous
duties test. Paired with a long test-equivalent salary level, a
stronger duties test would ensure that lower-paid employees who perform
large amounts of nonexempt work receive overtime protection, while
permitting employers to continue using the exemption for lower-paid
employees performing EAP duties. However, for the reasons previously
discussed, the Department proposes to restore the relationship between
the salary level and duties test by keeping the duties test unchanged
at this time and instead increasing the salary level moderately above
the long test level. This increase in the salary level is necessary for
the Department to effectively fulfill its role of defining and
delimiting the EAP exemption because, without it, the employees who
were not considered bona fide EAPs historically--those earnings between
the long and short test
[[Page 62168]]
salary levels who did not meet the historical long duties test--would
remain exempt from overtime. In other words, the Department's proposed
salary level methodology will better help limit the exemption of lower-
paid employees who historically were not considered bona fide EAP
employees because they perform substantial amounts of nonexempt work,
but who are not receiving overtime protection under the one-test
system.
Although the ``regulations cannot have the precision of a
mathematical formula[,]'' \191\ with only two variables to adjust in a
one-test system, and with the Department deciding to leave one of those
variables (the duties test) unchanged in this rulemaking, the
Department wanted to look more precisely at methods for updating the
salary level test. The Department has therefore looked to employee
earnings ventiles rather than only deciles as it has historically
done.\192\ The earnings ventiles between the long test salary level
(approximately the 26th or 27th percentile) and short test salary level
(approximately the 53rd percentile) are the 30th, 35th, 40th, 45th, and
50th percentiles of weekly earnings of full-time salaried workers in
the lowest-wage Census Region. The Department examined these earnings
ventiles with the goal of more effectively defining and delimiting the
exemption while maintaining the one-test system.
---------------------------------------------------------------------------
\191\ Weiss Report at 9.
\192\ Historically, the Department set the long test salary
level to exclude from exemption approximately the lowest-paid 10
percent of exempt salaried employees in the lowest-wage regions and
industries. In 2004 and 2019, the Department set the standard salary
level test equivalent to the 20th percentile of weekly earnings of
full-time salaried workers in the South Census Region and in the
retail industry nationally. In the 2016 rule, the Department set the
salary level equal to the 40th percentile of weekly earnings of
full-time salaried workers in the lowest-wage Census Region (the
South). See 84 FR 51236-37 (describing prior methodologies).
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Setting the salary level at the 40th percentile of weekly earnings
of full-time salaried workers in the lowest-wage Census Region would
reduce the impact of a one-test system on lower-paid white-collar
employees who perform significant amounts of nonexempt work. This
percentile is midway between the 30th and 50th percentiles and would
produce a salary level ($1,145 per week) that is roughly the midpoint
between the long and short test salary levels. Of the approximately
10.3 million salaried white-collar employees who earn between the long
and short test salary levels, approximately 47 percent earn between the
long test salary level and $1,145 and would receive overtime protection
by virtue of their salary, while approximately 53 percent earn between
$1,145 and the short test salary level and would have their exemption
status turn on whether they meet the duties test.
The Department remains concerned, however, that courts could find
this approach makes the salary level test determinative of overtime
eligibility for too many employees (i.e., 47 percent of those earning
between the long and short test levels). Setting the salary level equal
to the 45th or 50th percentile of weekly earnings would further amplify
this concern. In contrast, setting the salary level based on a lower
percentile of earnings will (compared to such higher levels) increase
the number of employees for whom duties is determinative of exemption
status, and in turn the ability of employers to use the exemption for
more lower-paid employees who meet the EAP duties requirements. This
outcome is consistent with the important role of the duties test in
identifying bona fide EAP employees and recognizes that the 2016 rule
(which set the salary level equal to the 40th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census
Region) was held invalid by the U.S. District Court for the Eastern
District of Texas for making too many employees eligible for overtime
based on salary alone.\193\
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\193\ See Nevada, 275 F.Supp.3d at 806-07.
---------------------------------------------------------------------------
The Department is also responding to concerns that setting the
salary level equal to the 40th percentile of weekly earnings of full-
time salaried workers in the lowest-wage Census Region would foreclose
employers from exempting any white-collar employees who earn less than
$1,145 per week and perform EAP duties, including those who were exempt
under the long test and remained exempt when the Department established
the one-test system in 2004 and set the salary level equivalent to the
long test level.\194\ Litigants challenging the 2016 rule also
emphasized this consequence of setting a salary level above the long
test in a one-test system, and those arguments have contributed to the
Department more fully attempting to account for the impact of the shift
from a two-test to a one-test system on the scope of the exemption.
Although some stakeholders have urged the Department to follow the
methodology from the 2016 rule or set an even higher threshold, the
Department has chosen a salary level that is appreciably lower than the
midpoint between the short and long test salary levels--an approach
that it believes is an appropriate method for identifying bona fide EAP
employees. This approach would also reasonably balance the goal of
ensuring that employees earning above the long test salary level but
performing substantial amounts of nonexempt work are not exempt with
the goal of enabling employers to use the exemption for employees who
do not perform substantial amounts of nonexempt work.
---------------------------------------------------------------------------
\194\ See 84 FR 51242.
---------------------------------------------------------------------------
The Department also examined the 30th and 35th percentiles of
weekly earnings of full-time salaried workers in the lowest-wage Census
Region. The Department did not consider setting the salary level at the
25th percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region ($901 per week or $46,852 per year) because
it is lower than the long test salary level ($925 per week or $48,100
per year, which is approximately the 26th or 27th percentile). Setting
the standard salary level at the 30th percentile of weekly earnings of
full-time salaried workers in the lowest-wage Census Region would
result in a salary level of $975 per week ($50,700 per year). This
salary level is roughly the midpoint between the 2004 methodology (the
20th percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census region and in retail nationally, currently $822 per
week or $42,744 per year), and the 2016 methodology (the 40th
percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region, currently $1,145 per week or $59,540 per
year). While setting the salary level equal to the 30th percentile of
weekly earnings of full-time salaried workers in the lowest-wage Census
Region would produce a salary level that is above the long test salary
level, it is very close to the long test salary level, and the
Department is concerned it would not sufficiently address the problem
inherent in the 2004 methodology of including in the exemption
employees who perform significant amounts of nonexempt work, including
those earning salaries closer to the long test salary level, and
historically were not considered bona fide EAP employees under the two-
test system. Additionally, only 11 percent of white-collar employees
who earn between the long and short test salary levels earn below the
30th percentile. As noted above, the Department believes that the
standard salary must fulfill the historical screening function of the
long test salary level and account for the shift to a one-test system,
and the
[[Page 62169]]
Department is concerned that this salary level would not fulfill both
objectives.
After careful consideration, the Department concludes that setting
the salary level equal to the 35th percentile--which produces a salary
level of $1,059 per week--will effectively define and delimit the scope
of the EAP exemption. Consistent with the Department's responsibility
to ``not only . . . determin[e] which employees are entitled to the
exemption, but also [to] draw[ ] the line beyond which the exemption is
not applicable[,]'' \195\ the Department's proposed standard salary
level will, in combination with the standard duties test, effectively
calibrate the scope of the exemption to ensure the exemption of bona
fide EAP employees, and do so in a way that distributes across the
population of white-collar employees earning between the long and short
test salary levels the impact of the shift to a one-test system.
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\195\ Stein Report at 2.
---------------------------------------------------------------------------
The Department stated in the 2019 rule that the primary and modest
purpose of the salary level is to identify potentially exempt employees
by screening out obviously nonexempt employees.\196\ While this initial
screening function is the primary effect of the salary level, as noted
above, each update to the salary level has also had a secondary effect:
it defines the group of white-collar employees for whom the duties test
is determinative of their exemption status. Setting the salary level
equal to the 35th percentile of weekly earnings of full-time salaried
workers in the lowest-wage Census Region produces a salary level high
enough above the long test level to ensure overtime protection for some
lower-paid employees who were traditionally entitled to overtime
compensation under the two-test system by virtue of their performing
large amounts of nonexempt work. The salary level is also low enough,
as compared with higher salary levels, to significantly shrink the
group of employees performing EAP duties who are excluded from the
exemption by virtue of their salary alone. Of the 10.3 million salaried
white-collar employees earning between the equivalent of the long and
short test salary levels, approximately 31 percent earn between $925
(the equivalent of the long test salary level) and $1,059 (the proposed
salary level) and would receive overtime protection by virtue of their
salary, while approximately 69 percent earn between $1,059 and $1,378
(the equivalent of the short test salary level) and would have their
exemption status turn on whether they meet the duties test.
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\196\ 84 FR 51238.
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Comparing the impact of the new salary level on white-collar
employees earning between the long and short test salary levels and
their employers reinforces the reasonableness of the Department's
proposed salary level. Whereas the 2004 and 2019 rules permitted the
exemption of such employees even if they performed significant amounts
of nonexempt work, and the 2016 rule prevented employers from using the
exemption for such employees earnings below the short test salary range
even if they performed EAP duties, the proposed methodology falls
between these two methodologies and therefore reasonably balances the
effect of the switch to a one-test system in a way that better
differentiates between those who are and are not employed in a bona
fide EAP capacity. Even though the Department's decision to select a
salary level below the midpoint between the long and short tests means
that the effect of the salary level on these employees and employers is
not equal, a higher salary level could disrupt reliance interests of
employers who (due in part to the Department's failure to update the
salary level tests between 1975 and 2004), have been able to use a
lower salary level and more lenient duties test to determine exemption
status since 1991. However, a significantly lower salary level akin to
the long test salary level would avoid disrupting such reliance
interests only by continuing to place the burden of the move to a one-
test system entirely on employees who historically were entitled to the
FLSA's overtime protections because they perform substantial amounts of
nonexempt work. The Department believes that employer reliance
interests should inform where the salary level is set between the long
and short test levels, and that its approach strikes a workable
equilibrium that reasonably balances, between employees' right to
receive overtime compensation and employers' ability to use the
exemption, the impact of a one-test system.
Such reasonable balancing is fully in line with the Department's
authority under the FLSA to ``mak[e] certain by specific definition and
delimitation'' the ``general phrases'' ``bona fide executive,
administrative, and professional employee.'' \197\ This grant of
authority confers discretion upon the Department to reasonably
determine the boundaries of these general categories; any such line-
drawing, as courts have recognized, will ``necessarily'' leave out some
employees ``who might fall within'' these categories.\198\
---------------------------------------------------------------------------
\197\ Walling, 140 F.2d at 831.
\198\ Id.
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The Department recognizes that it stated in its 2016 rule that the
current duties test could not be effectively paired with a salary level
below the short test salary range, and for this reason expressly
rejected setting the salary level at the 35th percentile of weekly
earnings of full-time salaried workers in the South.\199\ But that
rule, which would have prevented employers from using the EAP exemption
for some employees who were considered exempt under the prior two-test
system, was challenged in court, and a return to it would result in
significant legal uncertainty for both workers and the regulated
community. In the 2019 rule, the Department expressly rejected setting
the salary level equal to the long test or higher.\200\ However, as
noted above, the Department did not fully address in that rule the
implications of the switch from a two-test to a single-test system.
Having now grappled with those implications, particularly in light of
the Department's experience in the litigation challenging its 2016
rule, the Department has concluded that not only can it pair the
current duties test with a salary between the long and short test
salary levels, but that doing so appropriately recalibrates the salary
level in a one-test system to ensure that it effectively identifies
bona fide EAP employees.
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\199\ 81 FR 32410.
\200\ See 84 FR 51244.
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The Department is not proposing any changes to how bonuses are
counted toward the salary level requirement. Consistent with the
current regulations, if the salary level is finalized as proposed,
employers could satisfy up to 10 percent of the salary level ($105.90
per week under this proposed rule) through the payment of
nondiscretionary bonuses and incentive pay (including commissions) paid
annually or more frequently.\201\
---------------------------------------------------------------------------
\201\ Sec. 541.602(a)(3).
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4. Assessing the Impact of the Proposed Salary Level
As stated above, the Department believes that the salary level test
should fulfill a ``useful, but limited, role'' in defining and
delimiting the EAP exemption.\202\ In proposing to update the standard
salary level, the Department seeks to: preserve the primary role of an
analysis of employee duties in determining EAP exemption status, fully
restore the initial screening function of the salary level, and more
[[Page 62170]]
effectively identify in a one-test system who is employed in a bona
fide EAP capacity in a manner that reasonably distributes among
employees earning between the long and short test salary levels and
their employers the impact of the Department's move from a two-test to
a one-test system. A closer look at the expected impact of the proposed
salary level shows that it meets these objectives.
---------------------------------------------------------------------------
\202\ 84 FR 51238.
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The Department intentionally chose a salary level methodology that,
if finalized, would ensure that the EAP exemption status of the great
majority of white-collar employees would continue to depend on their
duties. To evaluate whether the proposed methodology meets this
objective, the Department first considered its effect on the population
of all salaried white-collar employees--the universe of employees who
could potentially be impacted by a change in the standard salary level.
This analysis confirmed that the number of white-collar employees who
would be excluded from the EAP exemption as a result of the
Department's proposed standard salary level is greatly exceeded by the
far-larger population of white-collar employees for whom duties would
continue to determine their exemption status.
As illustrated in Figure A below, of the approximately 43.8 million
salaried white-collar employees in the United States subject to the
FLSA,\203\ about 11.7 million earn below the Department's proposed
standard salary level of $1,059 per week and about 32.1 million earn
above the Department's proposed salary level.\204\ Thus, approximately
27 percent of salaried white-collar employees (most of whom, as
discussed below, do not perform EAP duties) earn below the proposed
salary level, whereas approximately 73 percent of salaried white-collar
employees earn above the salary level and would have their exemption
status turn on their job duties.\205\
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\203\ Excluded from this number are workers in named occupations
and those exempt under another non-EAP overtime exemption. The
exemption status of these groups will not be impacted by a change in
the standard salary level.
\204\ As discussed further below, see, e.g., section VII.B.5,
the Department used data representing compensation paid to nonhourly
white-collar workers to estimate compensation paid to salaried
white-collar employees.
\205\ Even this estimate is conservative, as it excludes 8.1
million white-collar employees employed as teachers, attorneys, and
physicians, for whom there is no salary level requirement under the
part 541 regulations and whose exemption status is therefore always
determined by their duties. If these employees in ``named
occupations'' are included, the percentage of white-collar employees
for whom exemption status would depend on duties, rather than
salary, increases to 77 percent. See Sec. Sec. 541.303-304.
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Scrutinizing these figures more closely reinforces the continued
importance of the duties test under the Department's proposal. Of the
approximately 11.7 million salaried white-collar employees who earn
below the Department's proposed standard salary level of $1,059 per
week, about 8.5 million earn below the long test salary level of $925
per week. As explained above, with the exception of the 2019 rule, when
the Department set the salary level slightly lower, the Department has
always set salary levels that screened from exemption employees earning
below the long test salary level. The number of salaried white-collar
employees for whom salary would be determinative of their nonexempt
status and who earn at least the long test salary level--3.2 million--
is nearly ten times smaller than the number of salaried white-collar
employees for whom job duties would continue to be determinative of
their exemption status because they earn at least the proposed standard
salary level--32.1 million.\206\
---------------------------------------------------------------------------
\206\ As noted above, see supra note 205, these figures do not
include the additional 8.1 million white-collar employees in
occupations for which there is no salary level requirement and so
duties is always determinative of exemption status.
[GRAPHIC] [TIFF OMITTED] TP08SE23.000
[[Page 62171]]
In analyzing how the Department's proposed salary level would
impact all salaried white-collar employees, the Department also
considered the extent to which salaried white-collar employees across
the income distribution perform EAP duties. As noted above, the salary
level has historically served as ``a helpful indicator of the capacity
in which an employee is employed, especially among lower-paid
employees;'' \207\ however, it should not eclipse the duties test.\208\
The Department's proposed standard salary level meets this standard
because, according to probability codes the Department has used in all
of its recent part 541 rules,\209\ most salaried white-collar employees
paid less than the proposed standard salary level do not meet the
duties test, whereas a substantial majority of salaried white-collar
employees earning above the proposed standard salary level meet the
duties test.
---------------------------------------------------------------------------
\207\ 84 FR 51239 (quoting 84 FR 10907).
\208\ See id. at 51245.
\209\ See section VII.B.5.
---------------------------------------------------------------------------
As illustrated in Figure B, of the 11.7 million salaried white-
collar employees who earn less than the proposed standard salary level
of $1,059 per week, the Department estimates that only 36 percent--
about 4.2 million employees--meet the standard duties test. In
contrast, of the 32.1 million salaried white-collar employees who earn
at least $1,059 per week, 76 percent--about 24.5 million employees--
meet the standard duties test.\210\ The number of salaried white-collar
workers who meet the standard duties test and earn below the proposed
standard salary level is thus nearly six times smaller than the number
of salaried white-collar workers who meet the standard duties test and
earn at least the proposed standard salary amount. And 85 percent of
all salaried white-collar workers who meet the standard duties test--
24.5 million out of a total of approximately 28.7 million--earn at
least the Department's proposed standard salary level.\211\
---------------------------------------------------------------------------
\210\ As noted above, see supra note 205, these figures exclude
salaried white-collar workers who are not subject to the part 541
salary criteria.
\211\ Note that these numbers refer only to salaried white-
collar employees at all salary levels who meet the standard duties
test, including employees who are nonexempt because they earn below
the current standard salary level.
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BILLING CODE 4510-27-P
[GRAPHIC] [TIFF OMITTED] TP08SE23.001
The Department next evaluated its proposed salary level methodology
by looking at salaried white-collar employees who earn between the long
and short test salary levels. As discussed in section IV.A.3.ii, the
long
[[Page 62172]]
and short test salary levels provide appropriate parameters for
determining how to update the salary level test. Under the Department's
proposal, duties would continue to be determinative of exemption status
for a significant majority of white-collar employees earning between
these thresholds.
As illustrated in Figure C, of the approximately 10.3 million
salaried white-collar employees who earn between the long test salary
level of $925 per week and the short test salary level of $1,378 per
week, about 31 percent (3.2 million) earn below the Department's
proposed standard salary level, and about 69 percent (7.1 million) earn
at or above the Department's proposed standard salary level. Moreover,
of the 3.2 million employees earning between the long test and the
proposed standard salary level, approximately half do not meet the
standard duties test.\212\
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\212\ As discussed further below, about 1.6 million of the
approximately 3.2 million salaried white-collar employees who earn
between the long test salary threshold and the Department's proposed
salary level (about 49 percent of these employees) do not meet the
standard duties test. Thus, in effect, only 16 percent of salaried
white-collar employees who earn between the long and short test
salary levels--1.6 million out of a total of 10.3 million--have
their exemption status determined solely by the proposed standard
salary level.
[GRAPHIC] [TIFF OMITTED] TP08SE23.002
BILLING CODE 4510-27-C
Finally, the Department also looked at the impact of the proposed
salary level on currently exempt EAP employees--those salaried white-
collar employees who meet the standard duties test and earn at least
$684 per week. As with every prior rulemaking to increase the part 541
salary levels, a relatively small percentage of currently exempt
employees would become nonexempt if this proposal were finalized. Of
the approximately 43.8 million salaried white-collar employees in the
United States, approximately 27.9 million currently qualify for the EAP
exemption.\213\ Of these 27.9 million presently-exempt employees, just
3.4 million earn at or above the current $684 per week standard salary
level but less than $1,059 per week and would, without some intervening
action by their employers, become entitled to overtime protection as a
result of the Department increasing the standard salary level to $1,059
per week. A test for exemption that includes a salary level component
will necessarily result in a number of employees who earned at or above
the prior salary level and pass the duties test becoming nonexempt when
the salary level is updated. This is a feature, and not a flaw, of a
salary level test, and as the
[[Page 62173]]
Department has consistently found since 1938, salary is an important
indicator of whether an individual is employed in a bona fide EAP
capacity and therefore a key element in defining the exemption.
---------------------------------------------------------------------------
\213\ Note that the 27.9 million employee figure only refers to
employees who meet the standard EAP exemption and thus differs from
the population of currently exempt EAP workers identified in the
economic analysis (28.4 million), which includes workers who qualify
only for the HCE exemption. As noted above, this is a conservative
estimate because there are also 8.1 million employees in the ``named
occupations'' who, under the Department's regulations, are exempt
based on their duties alone.
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The Department's proposed standard salary level would impact the
exemption status of two distinct and important, but relatively small,
groups of lower-paid EAP employees. First, the Department's proposal
would restore overtime protections to 1.8 million currently exempt
employees who meet the standard duties test but earn less than the
equivalent of the long test salary level ($925). As previously
explained, such employees were always excluded from the EAP exemption
prior to 2019, either by the long test salary level itself, or under
the 2004 rule salary level, which was equivalent to the long test
salary level. Fully restoring the salary level's initial screening
function requires a salary level that would ensure all employees who
earn below the long test level would be excluded from the exemption.
Second, the proposed standard salary level would result in overtime
protections for an additional 1.6 million currently exempt employees
who meet the standard duties test and earn between the long test salary
level ($925 per week) and the Department's proposed standard salary
level. As explained earlier, the Department believes it is necessary to
set the standard salary level above the long test level to reasonably
distribute the impact of the switch from a two-test system to a one-
test system. The Department's proposal would limit the number of
affected employees by setting a standard salary level towards the lower
end of the range between the long and short test salary levels and by
using earnings data from the lowest-wage Census region (the South).
Even among the 3.4 million affected employees, the fact that a
majority of these employees earn below the long test level underscores
the modest role of the Department's proposed standard salary level.
Beyond these 1.8 million employees earning less than the long test
salary level--to whom this proposal would simply restore overtime
protections that they had under every rule prior to 2019--the
Department's proposed increase in the standard salary level would only
affect the exemption status of 1.6 million employees. This group makes
up less than six percent of all currently exempt, salaried white-collar
employees and less than four percent of all salaried white-collar
employees.\214\ That this group is so small reinforces the conclusion
that the Department's proposed salary level methodology would maintain
the ``useful, but limited, role'' of the salary level in defining and
delimiting the EAP exemption.\215\
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\214\ The 3.4 million employees affected by the Department's
proposed standard salary level represent only 12 percent of the 27.9
million salaried white-collar employees who currently qualify for
the standard EAP exemption.
\215\ 84 FR 51238.
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5. Salary Level Alternatives
In determining which methodology to use to update standard salary
level, the Department considered several alternatives to its proposed
methodology of the 35th percentile of weekly earnings of full-time
salaried workers in the lowest-wage Census Region. As discussed, the
Department believes that the long and short test salary levels provide
appropriate boundaries for assessing potential salary levels,\216\
though it also considered the methodology used in the 2019 rule, which
set the standard salary level below the long test level.\217\ The
Department also looked at earnings ventiles for full-time salaried
workers falling between the long and short test salary levels. The
Department analyzed four alternative salary levels--two methodologies
that would produce a higher salary level than the proposed methodology,
and two that would produce a lower salary level.\218\
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\216\ See section IV.A.3.ii.
\217\ See 84 FR 51260.
\218\ The potential impact of these four alternatives is
discussed in greater detail below. See section VII.C.8.
---------------------------------------------------------------------------
The Department first considered setting the standard salary level
at the historical average short test salary level ($1,378 per week or
$71,656 per year).\219\ This would ensure that all employees who earn
between the long and short test salary levels and perform substantial
amounts of nonexempt work would be entitled to overtime compensation.
However, by making exemption status for all employees who earn between
the long and short test levels depend entirely on the salary paid by
the employer, this approach would also prevent employers from being
able to use the EAP exemption for employees earning between these
salary levels who do not perform substantial amounts of nonexempt work
and thus were historically exempt under the long test. For this reason,
among others, the Department has chosen not to propose the salary level
generated by this methodology.
---------------------------------------------------------------------------
\219\ See section IV.A.3.ii.
---------------------------------------------------------------------------
The Department also considered setting the standard salary level at
the 40th percentile of weekly earnings of full-time salaried workers in
the lowest-wage Census Region ($1,145 per week or $59,540 per year).
This salary level is roughly the midpoint between the long and short
test salary level alternatives ($925 per week and $1,378 per week,
respectively). However, as discussed above, the Department is concerned
that this approach could be seen by courts as making salary
determinative of exemption status for too large a portion of employees,
as this salary level would make the salary paid by the employer
determinative of exemption status for roughly half (47 percent) of
white-collar employees who earn between the long and short test salary
levels.\220\ The Department is also concerned that this approach would
generate the same concerns that led to the district court decision
invalidating the 2016 rule (which adopted the same methodology).\221\
---------------------------------------------------------------------------
\220\ See id.
\221\ See id.
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The Department also considered using the 2004 methodology (the 20th
percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census region and in retail nationally), which is currently
$822 per week ($42,744 per year). This is also the methodology that the
Department used in the 2019 rule.\222\ However, the salary level
produced by the 2004 methodology is below the equivalent of the long
test salary level ($925 per week). As discussed, the Department
considers the long test to be the lower boundary for an appropriate
salary level since, except for the 2019 rule, employees who earn below
the long test salary level have consistently been excluded from the EAP
exemption by the initial screening function of the salary level.\223\
Accordingly, the Department believes that a standard salary level
produced using the 2004 methodology would be too low to fully
effectuate the salary level's role in defining the EAP exemption.
---------------------------------------------------------------------------
\222\ 84 FR 51260.
\223\ See section IV.A.2; section IV.A.4.
---------------------------------------------------------------------------
The Department also considered setting the standard salary level at
the long test level ($925 per week or $48,100 per year). Doing so would
ensure the initial screening function of the salary level by restoring
overtime protections to those employees who were consistently excluded
from the EAP exemption prior to 2019, either by the long test salary
level itself, or under the 2004 rule salary level, which was set
equivalent to the long test salary
[[Page 62174]]
level.\224\ However, as explained above, setting the standard salary
level at the long test level would perpetuate the problem that has
become evident under the 2004 and 2019 rules. Specifically, this
approach would unduly deny overtime protections to all employees whose
entitlement to overtime compensation was protected by the more rigorous
long duties test.\225\ As noted above, however, the Department believes
that in a one-test system with the current duties test it must set the
salary level above the long test salary level in order to better define
and delimit which employees are employed in a bona fide EAP capacity.
---------------------------------------------------------------------------
\224\ See section IV.A.1.
\225\ See section IV.A.2.
---------------------------------------------------------------------------
While, for the reasons discussed herein, none of these alternatives
were used as a method to establish the proposed salary test level, they
confirm that the proposed salary level of the 35th percentile of weekly
earnings of all full-time salaried employees in the lowest-wage Census
Region (the South) is an appropriate salary level. The Department's
proposed salary level appropriately would account for the shift from a
two-test to a one-test system for determining exemption status,
protecting lower-paid white-collar employees who traditionally have
been entitled to overtime protection, while allowing employers to use
the exemption for EAP employees earning less than the short test salary
level.
The Department welcomes comments on its proposed increase to the
standard salary level. The Department also invites comments on
alternate salary methodologies and specifically how such alternative
methodologies would better define and delimit bona fide EAP employees
than the Department's proposed methodology.
B. Special Salary Levels--U.S. Territories and Motion Picture Industry
1. United States Territories
The FLSA's overtime requirements and the EAP exemption apply to
employees in U.S. territories.\226\ Historically, the Department
generally applied special, lower salary levels to employees in U.S.
territories that were not subject to the Federal minimum wage in
section 6(a)(1) of the FLSA. Consistent with this principle, as the
Department explained in the 2004 rule, the Department applied lower
salary levels to employees in Puerto Rico, the U.S. Virgin Islands, and
American Samoa because, until 1989, the FLSA permitted the
establishment of special minimum wage rates below the Federal minimum
wage in these territories.\227\ The Department did not set a special
salary level for employees in Guam, where the Federal minimum wage has
applied since at least 1957,\228\ or the CNMI.\229\
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\226\ 29 U.S.C. 213(f).
\227\ 69 FR 22172.
\228\ See Sarah A. Donovan, Cong. Rsch. Serv., R42713, The Fair
Labor Standards Act (FLSA): An Overview, 6 (Mar. 8, 2023). In 1957,
Congress amended section 13 of the FLSA to clarify that the Act's
minimum wage and overtime requirements apply to Guam. Public Law 85-
231, 71 Stat. 514 (Aug. 30, 1957) (codified at 29 U.S.C. 213(f)).
\229\ The CNMI was exempted from the FLSA's minimum wage
requirements, but not its overtime requirements, under the 1976
Covenant of Association with the United States, which established
the CNMI as a Commonwealth. Public Law 94-241, sec. 503(c), 90 Stat.
263, 268 (Mar. 24, 1976). Congress applied the FLSA's minimum wage
requirements to the CNMI for the first time in the Fair Minimum Wage
Act of 2007, which was subsequently amended in 2015; pursuant to
this legislation, the minimum wage in the CNMI gradually increased
until it reached the full section 6(a)(1) minimum wage in 2018. See
Public Law 110-28, sec. 8103, 121 Stat. 112, 188 (May 25, 2007);
Public Law 114-61, sec. 1, 129 Stat. 545 (Oct. 7, 2015); Minimum
Wage in the Northern Mariana Islands, WHD, available at: <a href="https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/cnmi.pdf">https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/cnmi.pdf</a>.
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In 1989, Congress amended the FLSA to apply the Federal minimum
wage to the U.S. Virgin Islands beginning that same year and to Puerto
Rico beginning in 1996, while maintaining special minimum wage rates
for American Samoa.\230\ When the Department next updated the salary
level tests in 2004, it applied the same salary level to employees in
Puerto Rico and the U.S. Virgin Islands that it applied to employees in
the 50 states and the District of Columbia ($455 per week), explaining
that because these territories were ``now subject to the same minimum
wage as the U.S. mainland, there was no longer a basis for a special
salary level test[.]'' \231\ The Department maintained a special salary
level for employees in American Samoa equal to approximately 84 percent
of the standard level ($380 per week), since American Samoa was not
subject to the Federal minimum wage. This was roughly the same ratio to
the U.S. mainland salary level that existed prior to 2004.\232\ The
Department also continued to apply the same salary level to employees
in Guam and the CNMI that it applied to employees in the U.S. mainland.
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\230\ See Public Law 101-157, sec. 4, 103 Stat. 938, 939-941
(Nov. 17, 1989).
\231\ 69 FR 22172.
\232\ Id.
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The Department followed the same approach in the 2016 rule. Like
the 2004 rule, the 2016 rule would have continued to apply the standard
salary level to employees in all the U.S. territories except for
American Samoa.\233\ It also would have maintained a special salary
level for employees in American Samoa, keeping it at 84 percent of the
standard salary level, since American Samoa was still subject to
special minimum wage rates below the Federal minimum wage.
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\233\ See 81 FR 32444. After the Department published the 2016
rule, Congress passed the Puerto Rico Oversight, Management, and
Economic Stability Act (PROMESA), Public Law 114-187, which
prevented the rule from taking effect in Puerto Rico until the
Comptroller General of the United States produced a report on the
impact of applying the rule to Puerto Rico and the Secretary of
Labor determined, based on the report, that applying the rule to
Puerto Rico would not have a negative impact on its economy. The
Comptroller General published its report in June 2018. See U.S.
Gov't Accountability Off., GAO-18-483, Puerto Rico: Limited Federal
Data Hinder Analysis of Economic Condition and DOL's 2016 Overtime
Rule (June 29, 2018). The 2016 rule was invalidated and so the
Department did not have occasion to further address this issue.
---------------------------------------------------------------------------
In the 2019 rule, the Department elected to preserve the 2004
standard salary level for employees in Puerto Rico, Guam, the U.S.
Virgin Islands, and the CNMI ($455 per week) instead of applying the
$684 per week salary level that applied to employees in the 50 states
and the District of Columbia; \234\ in effect, establishing a special
salary level for employees in territories that were subject to the
Federal minimum wage for the first time. In support of this approach,
the Department pointed to the economic climate in Puerto Rico; stated
that Guam, the U.S. Virgin Islands, and the CNMI, as U.S. territories,
also faced their own economic challenges; and expressed a desire to
promote salary level consistency across the U.S. territories.\235\ The
Department also maintained the 2004 special salary level for employees
in American Samoa ($380 per week).\236\ The Department determined that
a special salary level lower than the other four territories was
warranted for American Samoa because, like in 2004 and 2016, the
territory was subject to special minimum wage rates below the Federal
minimum wage.\237\
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\234\ 84 FR 51246.
\235\ Id. In the 2019 rule, the Department explained that while
PROMESA did not apply to rulemakings other than the 2016 rule, the
considerations that motivated PROMESA's adoption supported setting a
special salary level in Puerto Rico. See id. As in 2019, the
Department continues to believe that PROMESA does not constrain the
Department's authority to set a salary level for Puerto Rico in this
rulemaking.
\236\ Id.
\237\ Id.
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In Sec. 541.600, the Department proposes to return to its
longstanding pre-2019 approach of only setting special salary levels
for employees in those U.S. territories that are not subject to the
Federal minimum wage. Accordingly, the Department proposes to apply the
[[Page 62175]]
standard salary level ($1,059 per week) to employees in Puerto Rico,
where the Federal minimum wage has applied since 1996; Guam, where the
Federal minimum wage has applied since at least 1957; the U.S. Virgin
Islands, where the Federal minimum wage has applied since 1989; and the
CNMI, where the Federal minimum wage has applied since 2018. The
Department proposes to set a special salary level for employees in
American Samoa equal to 84 percent of the standard salary level ($890
per week, based on a proposed standard salary level of $1,059 per
month), since American Samoa remains subject to special minimum wage
rates below the Federal minimum wage.\238\ This is the same ratio to
the standard salary level that the Department used in the 2004 and 2016
rules, as well as the same ratio to the salary level in the other four
U.S. territories that the Department used in the 2019 rule.\239\
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\238\ Special wage rates by industry in American Samoa currently
range from $5.38 per hour to $6.79 per hour. See Federal Minimum
Wage in American Samoa, available at: <a href="https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/ASminwagePoster.pdf">https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/ASminwagePoster.pdf</a>.
\239\ As noted above, the Department set the special salary
level for American Samoa in the 2004 rule at $380 per week, which is
approximately 84 percent of the standard salary level of $455 per
week. 69 FR 22172. The 2016 rule would have set the special salary
level for American Samoa at $767 per week, which is 84 percent of
the standard salary level of $913 per week. 81 FR 32444. The 2019
rule preserved the 2004 salary level of $455 per week for employees
in Puerto Rico, Guam, the U.S. Virgin Islands, and the CNMI, as well
as the 2004 salary level of $380 per week (approximately 84 percent
of $455) for employees in American Samoa. 84 FR 51246.
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Pursuant to the Fair Minimum Wage Act of 2007, as amended,
industry-specific special minimum wage rates in American Samoa are
scheduled to be gradually eliminated. Under this legislation, barring
further Congressional action, special wage rates in American Samoa will
increase by $0.40 on September 30, 2024 and every 3 years thereafter
until they equal the Federal minimum wage.\240\ As such, the Department
also proposes that 90 days after the highest industry minimum wage for
American Samoa equals the Federal minimum wage, the full standard
salary level will apply for all EAP employees in all industries in
American Samoa.
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\240\ See Public Law 114-61, sec. 1, 129 Stat. 545 (Oct. 7,
2015).
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The Department recognizes that the salary levels for the U.S.
territories have not changed since 2004, and it understands that U.S.
territories face their own economic challenges. However, the FLSA's EAP
exemption should apply equally to employees subject to the Federal
minimum wage in section 6(a)(1) of the FLSA--including in the U.S.
territories, to which this provision explicitly applies--absent a
special minimum wage for the territory, which the Department has
interpreted as an indication of Congressional intent to treat employees
in the territory differently. As noted above, except for the 2019 rule,
the Department has taken the position that a special, lower salary
level should only be set for employees in those U.S. territories that
are not subject to the Federal minimum wage, a group which is currently
limited to employees in American Samoa.\241\ This approach provides a
clear and objective standard by which to determine whether to apply the
standard salary level or a special, lower salary level. Thus, in
accordance with the Department's longstanding practice, and in the
interest of applying the FLSA uniformly to all employees subject to the
Federal minimum wage, the Department proposes to apply the standard
salary level to employees in Puerto Rico, Guam, the U.S. Virgin
Islands, and the CNMI, and to maintain a special salary level for
employees in American Samoa equal to 84 percent of the standard salary
level until the highest industry minimum wage rate applicable in the
territory equals the Federal minimum wage.\242\
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\241\ Three U.S. territories have a local minimum wage higher
than the Federal minimum wage. The local minimum wage in Puerto Rico
is currently $9.50 per hour; the local minimum wage in Guam is
currently $9.25 per hour; and the local minimum wage in the U.S.
Virgin Islands is currently $10.50 per hour. See State Minimum Wage
Laws, WHD, available at: <a href="https://www.dol.gov/agencies/whd/minimum-wage/state">https://www.dol.gov/agencies/whd/minimum-wage/state</a>.
\242\ It is the Department's intent that the proposal to apply
the standard salary level to employees in territories that are
subject to the Federal minimum wage is severable from the proposal
to raise the standard salary level from the current amount ($684 per
week) to the 35th percentile of weekly earnings of full-time
salaried workers in the lowest-wage Census Region ($1,059 per week
using current data). The Department also intends that the proposal
to set the special salary level for employees in American Samoa
equal to 84 percent of the standard salary level, and to eliminate
the special salary level for American Samoa when the highest
industry minimum wage equals the Federal minimum wage, be severable
from the proposal to raise the standard salary level. The Department
has an interest in the uniform application of the EAP exemption to
all employees subject to the Federal minimum wage and in adopting a
clear and objective standard by which to determine whether to apply
a special salary level to any U.S. territory. Accordingly, the
Department's intent is to apply the standard salary level to
employees in those territories that are subject to the Federal
minimum wage and set a special salary for American Samoa equal to 84
percent of the standard salary level until the highest minimum wage
in the territory reaches the Federal minimum wage even if the
standard salary level amount proposed in this rule does not take
effect.
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The Department seeks comments on the proposed salary levels for the
U.S. territories.
2. Motion Picture Producing Industry
The Department permits employers to classify as exempt employees in
the motion picture producing industry who are paid a specified base
rate per week (or a proportionate amount based on the number of days
worked), so long as they meet the duties tests for the EAP
exemption.\243\ This exception from the salary basis requirement was
created in 1953 to address the ``peculiar employment conditions
existing in the [motion picture producing] industry,'' and applies, for
example, when a motion picture producing industry employee works less
than a full workweek and is paid a daily base rate that would yield the
weekly base rate if 6 days were worked.\244\ Consistent with its
practice since the 2004 rule, the Department proposes in Sec. 541.709
to increase the required base rate in proportion to the Department's
proposed increase in the standard salary level test, resulting in a
proposed base rate of $1,617 per week (or a proportionate amount based
on the number of days worked).\245\
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\243\ Sec. 541.709.
\244\ 18 FR 2881 (May 19, 1953).
\245\ The Department calculated this figure by dividing the
proposed standard salary level ($1,059 per week) by the current
standard salary level ($684 per week), and then multiplying this
result (rounded to the nearest hundredth) by the base rate set in
the 2019 rule ($1,043 per week). This produces a new base rate of
$1,617 (per week), when rounded to the nearest whole dollar.
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The Department seeks comments on the proposed base rate for the
motion picture industry.
C. Highly Compensated Employees
In the 2004 rule, the Department created the HCE test for certain
highly compensated employees. Combining a much higher compensation
requirement with a minimal duties test, the HCE test is based on the
rationale that employees who earn at least a certain amount annually--
an amount substantially higher than the annual equivalent of the weekly
standard salary level--will almost invariably pass the standard duties
test.\246\ The HCE test's primary purpose is thus to serve as a
streamlined alternative for very highly compensated employees because a
very high level of compensation is a strong indicator of an employee's
exempt status, thus eliminating the need for a detailed duties
analysis.\247\
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\246\ 84 FR 51249; see also Sec. 541.601(c) (``A high level of
compensation is a strong indicator of an employee's exempt status,
thus eliminating the need for a detailed analysis of the employee's
job duties.'').
\247\ See 69 FR 22173-74.
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As outlined in Sec. 541.601, to be exempt under the HCE test, an
employee must
[[Page 62176]]
earn at least the amount specified in the regulations in total annual
compensation, of which at least the standard salary amount per week
must be paid on a salary or fee basis,\248\ and must customarily and
regularly perform any one or more of the exempt duties or
responsibilities of an executive, administrative, or professional
employee. The HCE test applies only to employees whose primary duty
includes performing office or non-manual work. Employees qualifying for
exemption under the HCE test must receive at least the standard salary
level per week on a salary or fee basis, while the remainder of the
employee's total annual compensation may include commissions,
nondiscretionary bonuses, and other nondiscretionary compensation.\249\
Total annual compensation does not include board, lodging, or other
facilities, and does not include payments for medical insurance, life
insurance, retirement plans, or other fringe benefits. An employer is
permitted to make a final ``catch-up'' payment during the last 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.
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\248\ Although Sec. 541.602(a)(3) allows employers to use
nondiscretionary bonuses to satisfy up to 10 percent of the weekly
standard salary level when applying the standard salary and duties
tests, the Department's regulation at Sec. 541.601(b)(1) does not
permit employers to use nondiscretionary bonuses to satisfy the
weekly standard salary level requirement for HCE workers. Employers
may use commissions, nondiscretionary bonuses, and other
nondiscretionary compensation to satisfy the remaining portion of
the HCE total annual compensation amount. See 84 FR 51249.
\249\ Sec. 541.601(b)(1). The criteria for determining if an
employee is paid on a ``salary basis'' are identical under the
standard exemption criteria and the HCE test. See Helix Energy
Solutions, 143 S.Ct. at 683.
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The 2004 rule set the HCE total annual compensation amount at
$100,000,\250\ which exceeded the annual earnings of approximately 93.7
percent of salaried workers.\251\ In the 2016 rule, the Department set
the total annual compensation requirement for the HCE test at the
annualized weekly earnings of the 90th percentile of full-time salaried
workers nationally, which was $134,004.\252\ As previously noted,
however, the 2016 rule was enjoined before its effective date and was
subsequently invalidated in litigation.\253\ In 2019, the Department
set the HCE total annual compensation threshold at the 80th percentile
of full-time salaried worker earnings nationwide, resulting in a HCE
threshold of $107,432 per year.\254\
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\250\ 69 FR 22269 (Sec. 541.601(a)).
\251\ See id. at 22169 (Table 3).
\252\ See 81 FR 32429.
\253\ See Nevada, 275 F. Supp. 3d at 808. The district court's
decision did not specifically discuss the HCE test; however, the
decision invalidated the entire 2016 rule.
\254\ See 84 FR 51307 (Sec. 541.601(a)(1)); see also id. at
51249-50.
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The Department continues to believe that the HCE test is a useful
alternative to the standard salary level and duties tests for highly
compensated employees. However, as with the standard salary level, the
HCE total annual compensation level must be updated to ensure that it
remains a meaningful and appropriate standard to pair with the minimal
HCE duties test. To maintain the HCE test's role as a streamlined
alternative for those employees most likely to qualify as EAPs, the HCE
total annual compensation level must be high enough to exclude all but
those employees ``at the very top of [the] economic ladder.'' \255\
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\255\ 69 FR 22174.
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Accordingly, the Department proposes to update the HCE test by
setting the total compensation amount equal to the annualized weekly
earnings of the 85th percentile of full-time salaried workers
nationwide. Consistent with its prior rules, the Department is setting
the HCE test level using nationwide data, rather than a regional data
set. This approach results in a HCE threshold of $143,988, of which at
least $1,059 per week (the proposed standard salary level) must be paid
on a salary or fee basis.\256\
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\256\ It is the Department's intent that the increase in the HCE
total annual compensation threshold is independent of, and severable
from, the proposed increase in the standard salary level to the 35th
percentile of weekly earnings of full-time salaried employees in the
lowest-wage Census Region (the South).
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The Department considered updating the current HCE threshold (the
80th percentile) with current data (which would result in a
compensation level of $125,268), but is concerned that repeating the
2019 rule's methodology now would not produce a threshold high enough
to reserve the HCE test for employees at the top of today's economic
ladder and could risk the unintended exemption of large numbers of
employees in high-wage regions.\257\ The Department also considered
setting the HCE threshold at the 90th percentile, like in its 2016
rule. However, the Department is concerned that the resulting
compensation level ($172,796) could unduly restrict the use of the HCE
exemption for employers in lower-wage regions and industries.\258\ In
contrast, setting the HCE compensation level at the 85th percentile
would be a reasonable increase, particularly in comparison to the HCE
threshold initially adopted in 2004, which covered 93.7 percent of all
full-time salaried workers.\259\ The Department believes that setting
the HCE threshold at the annualized weekly earnings of the 85th
percentile of full-time salaried workers nationwide would be sufficient
to guard against the unintended exemption of workers who are not bona
fide executive, administrative, or professional employees, including
those in higher-income regions and industries.
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\257\ See 69 FR 22174 (explaining the need to avoid the
unintended exemption of employees ``such as secretaries in New York
City or Los Angeles . . . who clearly are outside the scope of the
exemptions and are entitled to the FLSA's minimum wage and overtime
pay protections.'').
\258\ See 84 FR 51250.
\259\ See 69 FR 22169-70 (Tables 3 and 4).
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Under the proposed rule, employers that are currently using the HCE
test to exempt more highly paid employees would instead need to apply
the standard salary and duties test for employees earning between the
current HCE threshold ($107,432) and the annualized weekly
[…truncated; see source link]Indexed from Federal Register on September 8, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.