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The Department of Labor (Department) proposes 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. For additional information, please see the Department’s fall regulatory plan narrative statement.

Statement of Need:

One of the primary goals of this rulemaking is to update the salary level requirement of the section 13(a)(1) exemption. A salary level test has been part of the regulations since 1938 and it has been long recognized that the best single test of the employer’s good faith in attributing importance to the employee’s services is the amount they pay for those services. In prior rulemakings, the Department explained its commitment to update the standard salary level and Highly Compensated Employees (HCE) total compensation levels more frequently. Regular updates promote greater stability, avoid disruptive salary level increases that can result from lengthy gaps between updates and provide appropriate wage protection.

Summary of the Legal Basis:

Section 13(a)(1) of the FLSA, codified at 29 U.S.C. 213(a)(1), exempts any employee employed in a bona fide executive, administrative, or professional capacity or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of the [Administrative Procedure Act.]) The FLSA does not define the terms executive, administrative, professional, or outside salesman. However, Congress explicitly delegated to the Secretary of Labor the power to define and delimit the specific terms of the exemptions through regulations.  Accordingly, the Department issues regulations at 29 CFR part 541 defining the scope of the section 13(a)(1) exemptions.

Alternatives:

The Department considered a range of alternatives before selecting its proposed methods for updating the standard salary level and the HCE compensation level.  The Department proposes to update the standard salary level using earnings for the 35th percentile of full-time salaried workers in the lowest range Census Region (the South), equivalent to $1,059 per week based on current data.  Alternatives considered for the standard salary level are: 1) 20th percentile of earnings of nonhourly full-time workers in the South Census region and the retail industry nationally equivalent to $822 per week; 2) 10th percentile of earnings of likely exempt workers, equivalent to $925 per week; 3) 40th percentile of earnings of nonhourly full-time workers in the South Census region, equivalent to $1,145 per week; and 4) a methodology based on the historical short test salary level, equivalent to $1,378 per week.

The Department proposes to update the HCE compensation level using earnings from the 85th percentile of all full-time salaried workers nationally, equivalent to $143,988 per year.  The Department also considered the following alternative methods to set the HCE compensation levels: 1) 80th percentile of nonhourly full-time workers nationally, equivalent to $125,268 annually; and 2) 90th percentile of nonhourly full-time workers nationally, equivalent to $172,796 annually.

The public is invited to provide comments on the proposed revisions and possible alternatives.

Anticipated Costs and Benefits:

The Department quantified three direct costs to employers in this analysis: 1) regulatory familiarization costs; 2) adjustment costs; and 3) managerial costs.  The Department estimated in Year 1, regulatory familiarization costs would be $427.2 million, adjustment costs would be $240.8 million, and managerial costs would be $534.9 million.  Total direct employer costs in Year 1 would be $1.2 billion.  The Department additionally estimated that the proposed rule over its first 10 years, would transfer approximately $1.3 billion per year from employers to employees in the form of increased wages.

Risks:

This action does not affect public health, safety, or the environment.