Instead, as the Department has previously noted, the 2004 methodology “addresses the concerns” of commenters advocating for multiple salary levels “by looking toward the lower end of the salary levels and considering salaries in the South and in the retail industry.” 69 FR 22171. Using these data, Susann Rohwedder and Jeffrey B. Wenger [211] [16] [26] This estimate assumes that the average is concentrated in the subset of employees requiring more analysis to make a decision. Thus, transfers due to the overtime pay provision are estimated to decrease from $321.0 million in Year 1 to $221.3 million in Year 10. The Department has carefully considered the timely submitted comments addressing the proposed changes. Therefore, the only differences in estimated costs presented here between the 2016 final rule and this final rule are attributable to the difference in earnings thresholds and the effects of the 2016 final rule's automatic updating mechanism. FLSA elaws - Exemptions The Department combined these categories with the SBA size standards to estimate the proportion of establishments and employees in each industry that are considered small or employed by a small entity, respectively. Such employers already have in place recordkeeping systems and standard operating procedures for ensuring employees work overtime under only employer-prescribed circumstances. Affected employees in small firms follow a similar pattern to affected workers in all establishments: the number decreases gradually in projected years. It is possible that the costs of the final rule may be disproportionately large for small entities, especially because small entities often have limited or no human resources personnel on staff. Included in this PRA section are the regulatory familiarization costs for this final rule. The clarification, consolidation, or simplification of compliance and reporting requirements for small entities. These workers' earnings will increase by the difference between their current earnings and the amount necessary to satisfy the new salary or compensation level. The Department recognizes that, in addition to conferring minimum wage and overtime protections on newly nonexempt employees, an updated salary level clarifies and strengthens the nonexempt status of employees who fail the duties test and earn between the previous salary level and the new one (i.e., those who are and will remain nonexempt), and thereby reduces the risk that those employees will be misclassified as exempt. The Department has otherwise refrained from setting industry-specific salary levels. In this paper, he examined time-series data on employee hours by industry. The fixed-wage model assumes that the standard hourly wage is independent of the statutory overtime premium. This final rule is issued pursuant to section 13(a)(1) of the Fair Labor Standards Act (FLSA or Act), 29 U.S.C. Please note that an employee must meet the salary basis test to be exempt under the FLSA. Several commenters highlighted the lower number of affected employees (compared to the 2016 final rule) in their particular states. For small entities, the Department projected various types of effects, including regulatory familiarization costs, adjustment costs, managerial costs, and payroll increases to employees. The Department believes that applying those same policies and systems to the workers whose exemption status changes will not be an unreasonable burden on small businesses. In addition, the Department acknowledges that to the extent workers who lose their exempt status as a result of the change in the standard salary level telecommute, but hourly and other nonexempt salaried workers do not telecommute, it may be necessary to develop ways of tracking such work by newly nonexempt workers. On July 26, 2017, the Department published an RFI to gather information to aid in formulating a proposal to revise the part 541 regulations. Any such final payment made after the end of the 52-week period may count only toward the prior year's total annual compensation and not toward the total annual compensation in the year it was paid. at 5 (“[T] he good faith specifically required by the [A]ct is best shown by the salary paid.”); id. 160. 248. The Fair Minimum Wage Act of 2007, as amended, provides that industry-specific minimum wage rates in American Samoa will increase every three years until each equals the federal minimum wage. Circumstances Necessitating Collection: The FLSA, 29 U.S.C. The Department referenced the screening function again in the 2004 final rule. The Department believes that its reliance on the reasoning of the district court is well-founded. We selected a general labor demand elasticity because employers will adjust their demand based on the cumulative change in employees' earnings, not on a conceptual differentiation between increases attributable to the minimum wage and the overtime provisions of the FLSA. Many employee representatives maintained that the salary level proposed in the NPRM is inconsistent with the purpose of the FLSA and the EAP exemption. 213(a)(1). To provide a general estimate of the size of the potential benefits from reducing litigation, the Department used data from the federal courts' Public Access to Court Electronic Records (PACER) system and the CPS to estimate the number and percentage of FLSA cases that concern EAP exemptions and are likely to be affected by the final rule. In sum, as explained in the NPRM, the Department believes that the 2016 final rule “untethered the salary level test from its historical justification[,]” 84 FR 10901, and that this resulted in its invalidation by the district court. For the HCE exemption, the relationship between earnings and exemption can be well represented with a linear function because the relationship is linear at high salary levels (as determined by the Department in the 2004 final rule). The Department agrees with commenters who stated that this commitment could deprive the Department of flexibility to adapt to unanticipated circumstances, and believes that prevailing economic conditions, rather than fixed timelines, should drive future updates. 175. found that “11.5 percent of salaried workers were classified as exempt by their employer although they did not meet the criteria for being so.” Using RAND's estimate of the rate of misclassification (11.5 percent), the Department estimated that approximately 255,400 salaried workers earning between $455 and $684 per week who fail the standard duties test are currently misclassified as exempt. The table also presents the average number of affected employees per establishment using the method in which all employees at the establishment are affected. . [251] Fisher & Phillips LLP and the National Federation of Independent Business (NFIB), however, questioned whether the Department has authority to set a salary level at all. A low salary level would also increase the burden on the employer to apply the duties test to more employees in determining whether an employee is exempt, which would inherently increase the likelihood of misclassification and, in turn, increase the risk that employees who should receive overtime and minimum wage protections under the FLSA are denied those protections. To estimate the total number of affected workers over time, the Department accounts for both of these effects. Workers with expected occasional overtime hours were treated like Type 3 affected workers (incomplete fixed-job model adjustments). Executive Order 13175, Indian Tribal Governments. This perpetual time horizon makes it especially important to avoid overemphasizing short-run compensation stickiness in the estimation approach; as such, the quantitative estimates will incorporate a relatively high compensation adjustment, the 80 percent derived from Barkume (2010), which assumes an initial overtime premium is paid, rather than the adjustment reflected in the estimates that are elsewhere identified as primary. Workers in states with minimum wages higher than the federal minimum wage could earn less than the state minimum wage working fewer hours. In addition, the use of earnings data from the South and the retail industry will ensure that the salary level is suitable for employees in low-wage regions and industries. DOWNLOAD THIS FORM: Choose a link below to begin downloading. In 2015, RAND released results from a survey conducted to estimate EAP exempt workers. The Department applied managerial costs to workers who (1) are reclassified as nonexempt, overtime-protected and (2) either regularly work overtime or occasionally work overtime, but on a predictable basis—an estimated 304,500 workers (see Table 13 and accompanying explanation). The Department has periodically updated the regulations governing these tests since the FLSA's enactment in 1938. The Department believes that the standard duties test, which focuses on whether an employee's “primary duty” consists of EAP tasks, can appropriately distinguish bona fide EAP employees from nonexempt workers. A few other commenters advocated for industry-specific salary levels, see National Newspaper Association, or exemptions from the salary level test for specific industries, see Family Focused Treatment Association, or for “seasonal” employers, see Corps Network. For example, in response to the RFI, the Chamber reported that, of surveyed employers who had implemented or made plans to implement changes to comply with the 2016 final rule, 76.4 percent reported that they had increased or planned to increase the salaries of some exempt employees to retain their exempt status. The updates specifically relate to executive, administrative, and professional employees. Commenters also noted that according to the Department's own estimates, 84 FR 10951, the proposed rule would result in 2.8 million fewer workers newly entitled to overtime pay in the first year than the 2016 final rule. 37. 84 FR 10913-14. . The Department estimated the number of affected workers and quantified costs and transfer payments associated with this final rule, using the currently-enforced 2004 salary level as the baseline. Industrial and Labor Relations Review, 64(1), 128-142. The Department proposed to inflate the salary level to reflect anticipated wage growth to January 2020, the final rule's estimated effective date. Table 13—Affected EAP Workers by Type (1,000s), Year 1. On may 18 2016 the us. The salary level test provides certainty for employers and employees, as well as efficiency for government enforcement agencies. See, e.g., Center for Popular Democracy; Demos; Oxfam America. Other commenters did specifically address the final rule's effective date. After determining the potential number of EAP cases that the final rule may avoid, the Department examined a selection of 56 FLSA cases concluded between 2012 and 2015 that contained litigation cost information to estimate the average costs of litigation to assign Start Printed Page 51281to the potentially avoided EAP cases. The Department agrees with commenters that increasing the HCE threshold so dramatically would result in significant administrative burdens and compliance costs, including costs associated with reassessing the exempt status of many highly paid white collar workers under the standard duties test. Primary duty consistent with 5 CFR 551 (e.g. The Department believes these concerns are overstated. The Department recognizes that this level should be updated to reflect current earnings. 8. See, e.g., EPI; NELP; UAW. 13771, the economic impacts should be compared to what is currently published in the CFR. In contrast, the 2004 methodology has never even been challenged in court—let alone invalidated—during the 15 years it has been enforced by the Department. 65. Thus, for example, an exempt employee guaranteed at least $684 each week paid on a salary basis may also receive additional compensation of a one percent commission on sales. This elasticity estimate is based on the Department's analysis of the following paper: Lichter, A., Peichl, A. For example, for every ten public relations managers, between five and nine were estimated to pass the standard duties test (based on probability category 2). By Year 10, additional costs and payroll for small businesses have decreased from $231.9 million in Year 1 to $118.5 million (Table 36). 70. 185. Multiplying the average change of $4.93 by the 1.2 million EAP workers affected by the change in the standard salary level and 52 weeks equals an increase in earnings of $296.1 million in the first year (Table 17). 8. RAND Labor and Population. [188] Few commenters addressed this issue, but those who did all supported the Department's proposal. The Department identified four types of workers whose work characteristics affect how it modeled employers' responses to the changes in both the standard and HCE salary levels: The Department began by identifying the number of workers in each type. [4] United States Department of Agriculture. For example, if the SBA standard is that establishments with 500 employees are “small,” and 1,350 affected workers are employed by small establishments in that industry, then the smallest number of establishments that could be affected in that industry (the true lower bound) would be three. Under this test, employees who are paid total annual compensation of at least $100,000 (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA's overtime requirements if they customarily and regularly perform at least one of the duties or responsibilities of an exempt EAP employee identified in the standard tests for exemption.[235]. In order to provide a more accurate estimate, this final rule applies conditional probabilities to determine the number of affected HCE workers. After Year 1, these costs will be relatively small since the majority of workers will be affected in Year 1. See https://www.cbo.gov/publication/53651. These are among the important policy and research questions raised in this comprehensive volume, of interest to policymakers, researchers, personnel directors, union leadersâ€"anyone concerned about the economic parity of women. See id. Frequency: Various (unaffected by this rulemaking). The full overtime premium model is a special case of the general fixed-wage model in that the Department assumes the demand for labor under these circumstances is completely inelastic. By Year 10, the Department estimates that 723,000 workers will be affected by the change in the standard salary level test and 154,000 workers will be affected by the change in the HCE total annual compensation test, compared to a baseline assuming the currently-enforced earnings thresholds (i.e., $455 per week and $100,000 per year) remain unchanged. 193. The Department used the incomplete fixed-job model to estimate changes in the regular rate of pay for Type 3 workers and the 50 percent of Type 2 workers who regularly work occasional overtime. The Department continues to believe that an average of one hour per establishment is appropriate. The district court's decision underscores that except at the relatively low levels of compensation where EAP employees are unlikely to be found, the salary level is not a substitute for an analysis of an employee's duties. Consequently, the Department switched from the long and short duties tests to a single duties test that, like the previous short duties test, did not include a quantitative limit on the percentage of time performing nonexempt work. There was little precedent or data to aid in evaluating managerial costs. Section 13(a)(1) of the FLSA, codified at 29 U.S.C. 2017 Census of Governments. The final rule will transfer income to affected workers who work in excess of 40 hours per week. This was estimated to be 1.3 million workers. 212. to the duties of the relevant exemption to determine if the employee qualifies for that exemption. EPI and a few other commenters asserted that the Department's use of pooled 2015-2017 data to calculate the number of affected workers “leads to an underestimate because it doesn't account for employment growth and other changes in the three years between 2017 and 2020.” The Department is using pooled CPS MORG data for July 2016 through June 2019, adjusted to reflect 2018/2019, in this final rule. Sources: Private sector payroll and revenue data from 2012 Economic Census. To avoid underestimating these costs, the Department assumed that regulatory familiarization occurs at a decentralized level and used the number of establishments in its cost estimate; this results in a higher estimate than would result from using the number of firms. Third, sampling weights were adjusted to reflect employment growth. 60. 230. 182. To ensure that the estimated costs of the 2016 final rule can be directly and appropriately compared with the costs estimated for this final rule, the Department started with the analytic model for this final rule and replaced this final rule's salary and compensation thresholds with the thresholds that would be required by the 2016 final rule, including that rule's provision to automatically update the salary level on a triennial basis. We use the term “full overtime premium” to describe the adjustment process as modeled. It further stated that the 2004 approach has withstood the test of time, would restore the salary level to its traditional purpose of serving as a dividing line between nonexempt and potentially exempt employees, would address concerns that led to the 2016 rule's invalidation, and would ensure that the FLSA's intended overtime protections are fully implemented. See 69 FR 12167 (noting the Department's “long-standing tradition of avoiding the use of inflation indicators for automatic adjustments to these salary requirements”). The Department did not receive any comments on the methodology it used to estimate potential reduced litigation costs. Second, the Department considers costs and transfers by region and by industry. Currently, the Department is enforcing the regulations in effect on November 30, 2016, including the $455 per week standard salary level, which is the level that was set in a final rule issued April 23, 2004 (“2004 final rule”). 09/26/2019 at 8:45 am. Employees who meet the requirements of part 541 are excluded from the Act's minimum wage and overtime pay protections. State and local government commenters disagreed over how the Department should update the earnings thresholds going forward. 156. Several employer representatives who opposed the proposed HCE level stated that adjusting to the new level would be particularly burdensome. 219. First-year state and local government costs compose 0.001 percent of state and local government revenues (projected 2018 revenues were estimated to be $3.7 trillion). The law establishes minimum wage, overtime premium pay for hours worked beyond 40 per week, and recordkeeping requirements. The Chamber, IFA, and the National Lumber and Building Material Dealers Association criticized the NPRM's rationale that the 10 percent limit was necessary to help maintain parity between sectors that use such pay methods and those that traditionally have not done so,[96] SUSB reports data by “enterprise” size designations (a business organization consisting of one or more domestic establishments that were specified under common ownership or control). See National Employment Lawyers Association (NELA); Nichols Kaster, PLLP (Nichols Kaster); Rudy, Exelrod, Zieff & Lowe, LLP (Rudy Exelrod); Texas Employment Lawyers Association (TELA). See 541.601(b)(1). However, in both this rule and the 2016 final rule, workers with strengthened overtime protections—those who fail the standard duties test and earn at least $455 but below the new standard salary level—are included in the description of affected workers but not in the official calculation of affected workers. Average percent of revenue per affected entity, Average percent of payroll per affected entity, Average payroll increase per affected entity, Range of payroll increases per affected entity. In this situation, the employer may within one month after the end of the year make a payment of at least $5,432 to the employee. These small establishments employ about 53.1 million workers, about 37 percent of workers employed by all establishments (excluding self-employed, unpaid workers, and members of the armed forces), and account for roughly 36 percent of total payroll ($2.9 trillion of $8.0 trillion). For the other method, by definition, there is always one affected employee per establishment. [13] The RFA defines a “small entity” as a (1) small not-for-profit organization, (2) small governmental jurisdiction, or (3) small business. When modeling employer responses with respect to the adjustment to the regular rate of pay, the Department used the incomplete fixed-job model. In 1985, the Department published an Advance Notice of Proposed Rulemaking that was never finalized. The Department thus estimates regulatory familiarization costs in Year 1 will be $340.4 million ($43.38 per hour × 1 hour × 7.85 million establishments).[170]. [179] 7. 227. A complete tax and financial guide for churches and other nonprofit organizations, written in plain English. (2012). The 2004 final rule analysis similarly did not adjust for these workers. The FLSA prescribes standards for wages and overtime pay. documents in the last year, 30 [84] As noted in the NPRM, “[a] salary level is helpful to determine who is not an executive, administrative or professional employee” because it “is a helpful indicator of the capacity in which an employee is employed, especially among lower-paid employees.” 84 FR 10907. The Department is not aware of any statistically robust source that more closely reflects salary as defined in its regulations. Additionally, the gap between the latest month covered by the data set—June 2019—and the rule's effective date—January 2020—is only six months. For example, the National Association of Manufacturers stated that the proposed increase would require employers to spend significant time determining whether employees who previously met the HCE test satisfy the standard duties test (and thus remain exempt), and requested that if the Department were to finalize that increase as proposed, it should set a future compliance date that provides sufficient time for employers to adjust to the new HCE level. 121. 10. [5] (2003). FLSA Exemption Test Worksheet (Completed by Human Resources) Executive, Teaching, Professional, Administrative, and Computer Exemption Tests . Total private sector first-year costs compose 0.002 percent of national private sector revenues (revenues in 2018 are projected to be $40.9 trillion). The Department followed a similar methodology when determining the salary level increase in 1963. 2017). . through regulations. 186. In general, these commenters contended that the proposed salary level was too low to adequately distinguish between bona fide EAP employees and those who were intended to be eligible for overtime, and that the rule would result in the exemption of lower-wage workers with limited bargaining power, whom the statute was designed to protect. 199. This rule is considered an Executive Order 13771 deregulatory action. 81 FR 32430. With the Jan. 1, 2020 effective date on the horizon, employers should take steps to prepare: Review positions currently classified as exempt from overtime pay. 170. 200. The Department does not exclude them from the analysis, however, because there is no data set that would adequately inform an estimate of the size of this worker population, although the Department believes it is a small percentage of workers. The Department expects total direct employer costs will range from $80.1 million to $97.1 million for affected small establishments (Table 32) in the first year. Accordingly, the salary level test's limited purpose is to screen out only those employees who are not performing bona fide EAP duties. Unless exempt, covered employees must be paid at least the minimum wage and not less than one and one-half times their regular rates of pay for overtime hours worked. Households are surveyed for four months, excluded from the survey for eight months, surveyed for an additional four months, then permanently dropped from the sample. The FLSA provides a number of exemptions from the Act's minimum wage and overtime pay provisions, including one for bona fide executive, administrative, and professional (EAP) employees. A CEO of a professional placement firm indicated that tracking of hours would produce increased human resources paperwork and technology costs. To estimate adjusted hours worked, the Department set the percent change in total hours worked equal to the percent change in average wages multiplied by the wage elasticity of labor demand.[204]. Second, the Department compared workers' counter-factual earnings (i.e., absent this final rule) to the earnings levels. This principle has been at the heart of the Department's interpretation of the EAP exemption for over 75 years. While every effort has been made to ensure that The Department has therefore engaged in this rulemaking to realign the salary level with its appropriate limited purpose, to address the concerns about the 2016 final rule identified by the district court, and to update the salary level in light of increased employee earnings. However, because the data are representative of both the population and all twelve months in a year, the Department believes the share of Type 2 workers identified in the CPS data in the given week is representative of an average week in the year. At the time this level was initially set in 2004 at $100,000, the Department concluded that “white collar” employees who earn above this threshold would nearly always satisfy any duties test. These activities frequently include: tax, finance, accounting, audit, insurance, qualityan employee to qualify as being EXEMPT from overtime, and thus not be required to be paiing a primary duty of performing administrative functions directly related to academicAdministrative duties do not include routine or structured tasks such as bookkeeping . Likewise, the Department declines to set any additional industry-specific salary levels. Thus, the number of affected small establishments in an industry, if all employees of an affected establishment are affected, equals the number of affected small establishment employees divided by the average number of employees per small establishment. [208] Once this rule is effective, white collar employees who are subject to the salary level test and earn less than $684 per week will not qualify for the EAP exemption, and therefore will be entitled to overtime pay. The Chief Counsel for Advocacy of the Small Business Administration submitted public comments on the NPRM which are addressed below. (i) If by the last pay period of the 52-week period the sum of the employee's weekly salary plus nondiscretionary bonus, incentive, and commission payments received is less than 52 times the weekly salary amount required by § 541.600(a), the employer may make one final payment sufficient to achieve the required level no later than the next pay period after the end of the year. Therefore, to estimate a lower-end estimate for the number of affected establishments (which generates an upper-end estimate for impacts per establishment) the Department assumed that all workers employed by an affected establishment are affected. As described above, the Department is updating the HCE compensation level using earnings for the 80th percentile of all full-time salaried workers nationally, $107,432 per year. Fair Labor Standards Act (FLSA) Determination = (EXEMPT) 1. . For the purpose of this rulemaking, the Department considers data representing compensation paid to nonhourly workers to be an appropriate proxy for compensation paid to salaried workers. 545 (Oct. 7, 2015). The economic analysis Start Printed Page 51232quantifies the direct costs resulting from the rule: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. Regulatory familiarization costs and adjustment costs do not vary across the scenarios. Table 35 reports affected workers in selected years only. Therefore, in the NPRM the Department used the estimate of 1.25 hours from the 2016 final rule after reviewing public comments on the 2015 NPRM, and it is again using this estimate in this final rule. See Kentucky Retail Federation; SBA Advocacy. (2003). We used the standard Pareto distribution approach to impute earnings above the topcoded value as described in Armour, P. and Burkhauser, R (2013). Thus, EPI used the earnings levels associated with the first automatic update (which it calculated to be $51,053 for the standard salary level) for the 2016 rule. Thus, when Barkume assumed that workers would receive an average voluntary overtime pay premium of 28 percent in the absence of an overtime pay regulation, which is the average overtime premium that Bell and Hart (2003) found British employers paid in the absence of any overtime regulations, the straight-time hourly wage adjusted downward by 80 percent of the amount that would occur with the fixed-job model. Second, Kuroda also found that the pure fixed-job model results may not hold under all conditions. The Department selected a standard salary level of $455 per week, which at the time was roughly equivalent to earnings at the 20th percentile of two subpopulations: (1) Salaried employees in the South and (2) salaried employees in the retail industry nationwide. Direct employer costs of this final rule are estimated to be, on average, $534.8 million lower per year in perpetuity than the 2016 final rule (using a 7 percent discount rate). 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