[Federal Register Volume 68, Number 61 (Monday, March 31, 2003)]
[Proposed Rules]
[Pages 15560-15597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7449]
[[Page 15559]]
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Part II
Department of Labor
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Wage and Hour Division
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29 CFR Part 541
Defining and Delimiting the Exemptions for Executive, Administrative,
Professional, Outside Sales and Computer Employees; Proposed Rule
Federal Register / Vol. 68, No. 61 / Monday, March 31, 2003 /
Proposed Rules
[[Page 15560]]
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DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 541
RIN 1215-AA14
Defining and Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales and Computer Employees
AGENCY: Wage and Hour Division, Employment Standards Administration,
Labor.
ACTION: Proposed rule and request for comments.
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SUMMARY: The Department of Labor proposes to update and revise the
regulations issued under the Fair Labor Standards Act (FLSA)
implementing the exemption from minimum wage and overtime pay for
executive, administrative, professional, outside sales and computer
employees. These exemptions are often referred to as the FLSA's ``white
collar'' exemptions. To be considered exempt, employees must meet
certain minimum tests related to their primary job duties and be paid
on a salary basis at not less than specified minimum amounts. The basic
``duties'' tests were originally established in 1938 and revised in
1940. The duties tests were last modified in 1949 and have remained
essentially unchanged since that time. The ``salary basis'' test has
remained essentially unchanged since 1954. The salary levels required
for exemption were last updated in 1975, and the amounts adopted at
that time were intended as an interim adjustment. Suggested changes to
the part 541 regulations have been the subject of public commentary for
years, including a review of the regulations by the U.S. General
Accounting Office (GAO) in 1999. GAO recommended that the Secretary of
Labor comprehensively review and make necessary changes to the part 541
regulations to better meet the needs of both employers and employees in
the modern work place, and to anticipate future work place trends.
During 2002, the Department of Labor convened a series of stakeholder
meetings, and heard suggestions for changes from over 40 interest
groups representing employees and employers. The Department of Labor
has carefully examined issues of concern raised by various interested
parties in developing this proposed rule. The Department now invites
public comment on all aspects of the proposed rule.
DATES: Submit written comments on or before June 30, 2003.
ADDRESSES: Address written comments to Tammy D. McCutchen,
Administrator, Wage and Hour Division, Employment Standards
Administration, U.S. Department of Labor, Room S-3502, 200 Constitution
Avenue, NW., Washington, DC 20210. Commenters who would like to be
notified that their comments were received should include with their
comments a self-addressed, stamped postcard or submit them certified
mail, return receipt requested. As a convenience, comments of 20 pages
or less may be submitted by facsimile (``FAX'') machine to (202) 693-
1432, which is not a toll-free number, or by e-mail to: esa.gov">[email protected]esa.gov. Because we continue to experience delays in
receiving mail in our area, commenters are encouraged to submit any
comments by mail early, or to transmit them electronically by FAX or e-
mail.
FOR FURTHER INFORMATION CONTACT: Richard M. Brennan, Deputy Director,
Office of Enforcement Policy, Wage and Hour Division, Employment
Standards Administration, U.S. Department of Labor, Room S-3506, 200
Constitution Avenue, NW., Washington, DC 20210. Telephone: (202) 693-
0745 (this is not a toll-free number). Copies of this proposed rule may
be obtained in alternative formats (Large Print, Braille, Audio Tape or
Disc), upon request, by calling (202) 693-0023 (not a toll-free
number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain
information or request materials in alternative formats.
Questions of interpretation and/or enforcement of regulations
issued by this agency or referenced in this notice may be directed to
the nearest Wage and Hour Division District Office. Locate the nearest
office by calling our toll-free help line at 1-866-4USWAGE (1-866-487-
9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto
the Wage and Hour Division's Web site for a nationwide listing of Wage
and Hour District and Area Offices at: http://www.dol.gov/esa/contacts/whd/america2.htm.
SUPPLEMENTARY INFORMATION:
I. Paperwork Reduction Act
This proposed rule contains no new information collection
requirements subject to review and approval by the Office of Management
and Budget under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501,
et seq.). The information collection requirements for employers who
claim exemption under 29 CFR part 541 are contained in the general FLSA
recordkeeping requirements codified at 29 CFR part 516, which were
approved by the Office of Management and Budget under OMB Control
number 1215-0017. See 29 CFR 516.0 and 516.3.
II. Background
The FLSA generally requires covered employers to pay their
employees at least the federal minimum wage (which is currently $5.15
an hour), and overtime premium pay of time-and-one-half the regular
rate of pay for all hours worked over 40 in a work week. However, the
FLSA includes a number of exemptions from the minimum wage and overtime
requirements. Section 13(a)(1) of the FLSA, codified at 29 U.S.C.
213(a)(1), exempts from both minimum wage and overtime pay ``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,
pursuant to Congress' grant of rulemaking authority, implementing
regulations have been issued, at 29 CFR part 541, defining the scope of
the section 13(a)(1) exemptions. Because the FLSA delegates to the
Secretary of Labor the power to define and delimit the specific terms
of the exemptions through notice-and-comment rulemaking, the
regulations so issued have the binding effect of law.\1\
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\1\ See Batterton v. Francis, 432 U.S. 416, 425 n. 9 (1977).
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These exemptions have engendered considerable confusion over the
years regarding who is, and who is not, exempt. The implementing
regulations generally require each of three tests to be met for the
exemption to apply: (1) The employee must be paid a predetermined and
fixed salary, not an hourly wage that is subject to reductions because
of variations in the quality or quantity of work performed (the
``salary basis test''); (2) the amount of salary paid must meet minimum
specified amounts (the ``salary level test''); and (3) the employee's
job duties must primarily involve managerial, administrative or
professional skills as defined by the regulations (the ``duties
tests'').
Legislative History
Section 13(a)(1) was included in the original FLSA of 1938, and was
based on provisions contained in the earlier
[[Page 15561]]
National Industrial Recovery Act and state law precedents. Specific
references in the legislative history to the employee exemptions
contained in section 13(a)(1) are scant. However, the exemptions were
premised on the belief that the workers exempted typically earned
salaries well above the minimum wage, and they were presumed to enjoy
other compensatory privileges such as above average fringe benefits,
greater job security and better opportunities for advancement, setting
them apart from the nonexempt workers entitled to overtime pay.\2\
Further, the type of work they performed was difficult to standardize
to any time frame and could not be easily spread to other workers after
40 hours in a week, making enforcement of the overtime provisions
difficult and generally precluding the potential job expansion intended
by the FLSA's time-and-a-half overtime premium.\3\
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\2\ Report of the Minimum Wage Study Commission, Volume IV, pp.
236 and 240 (June 1981).
\3\ Id.
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Initially, persons employed in a ``local retailing capacity'' were
also exempt, but Congress eliminated that language from the section
13(a)(1) exemptions in 1961 when the FLSA was expanded to cover retail
and service enterprises.\4\ Teachers and academic administrative
personnel were added to the exemption when elementary and secondary
schools were made subject to the FLSA in 1966. The Education Amendments
of 1972 made the Equal Pay provisions, section 6(d) of the FLSA,
expressly applicable to employees who were otherwise exempt from the
FLSA under section 13(a)(1). A 1990 enactment expanded the exemption to
include computer systems analysts, computer programmers, software
engineers, and similarly skilled professional workers, including those
paid on an hourly basis if paid at least 6\1/2\ times the minimum
wage.\5\ The compensation test for computer-related occupations was
subsequently capped at $27.63 an hour (6\1/2\ times the former $4.25
minimum wage) when Congress increased the minimum wage to its current
$5.15 rate and enacted the new section 13(a)(17) exemption for such
computer employees as part of the 1996 FLSA Amendments.\6\
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\4\ Public Law 87-30, 75 Stat. 65 (May 5, 1961). Although
Congress eliminated the separate, broad exemption for retail
employees in 1961, such employees could still qualify as exempt
executive, administrative or professional employees if they met the
requirements for these exemptions, and Congress relaxed the duties
tests solely to make it easier for such firms to meet the exemption
requirements.
\5\ Public Law 101-583, 104 Stat. 2871 (Nov. 15, 1990).
\6\ 29 U.S.C. 213(a)(17), as added by the 1996 FLSA Amendments
(sec. 2105(a), Public Law 104-188, 110 Stat. 1755 (Aug. 20, 1996)).
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Regulatory History
The FLSA became law on June 25, 1938, and the first version of part
541 was issued later that year in October (3 FR 2518; Oct. 20, 1938).
In 1940, after receiving many comments on the original regulations, the
Wage and Hour Division convened a series of public hearings for
interested parties to express views on the regulations and to propose
amendments. Revised regulations were issued in October 1940 (5 FR 4077;
Oct. 15, 1940).\7\ Further hearings were initiated in 1947, leading to
revised regulations that were issued in December 1949 (14 FR 7705; Dec.
24, 1949).\8\ An explanatory bulletin interpreting some of the terms
used in the regulations was published as subpart B of part 541 on
December 28, 1949 (14 FR 7730), and became effective on January 25,
1950. On March 9, 1954, the Department issued proposed revisions to the
regulatory interpretations of ``salary basis'' (19 FR 1321), followed
by a final rule issued on July 17, 1954 (19 FR 4405). The regulations
were revised in 1958 to adjust the salary levels (23 FR 8962; Nov. 18,
1958).\9\ Further changes were made to accommodate statutory amendments
to the FLSA and/or to increase the salary levels in 1961, 1963, 1967,
1970, 1973, and 1975.\10\ The existing salary rates were last revised
on an interim basis in 1975 (see 40 FR 7092; Feb. 19, 1975). Revisions
to increase the salary rates in January 1981 (issued at the end of the
Carter Administration) were stayed indefinitely by the incoming Reagan
Administration (46 FR 11972; Feb. 12, 1981). Based on petitions from
industry groups to address other parts of the rules, and developing
case law, the Department began a more comprehensive review leading to a
1985 Advance Notice of Proposed Rulemaking (ANPRM) that reopened the
public comment period and broadened the review to all aspects of the
regulations (50 FR 47696; Nov. 11, 1985).
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\7\ 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'').
\8\ 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'').
\9\ See, Report and Recommendations on Proposed Revisions of
Regulations, part 541, under the Fair Labor Standards Act, by Harry
S. Kantor, Presiding Officer, Wage and Hour and Public Contracts
Divisions, U.S. Department of Labor (March 3, 1958) (``Kantor
Report'').
\10\ See, 26 FR 8635 (Sept. 15, 1961); 28 FR 9505 (Aug. 30,
1963); 32 FR 7823 (May 30, 1967); 35 FR 883 (Jan. 22, 1970); 38 FR
11390 (May 7, 1973); and 40 FR 7091 (Feb. 15, 1975).
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The Department revised these regulations in the early 1990s to
address two specific issues. A 1990 law (Pub. L. 101-583; Nov. 15,
1990) required regulations to be issued permitting computer systems
analysts, computer programmers, software engineers, and other
similarly-skilled workers in the computer field to be exempt, including
those paid on an hourly basis if the hourly rate exceeded 6\1/2\ times
the applicable minimum wage. (57 FR 46744; Oct. 9, 1992). Also, in
1992, the Department issued a final rule to modify the exemption's
requirement for payment on a ``salary basis'' as applied in the public
sector for otherwise exempt employees paid according to pay and leave
systems based on principles of public accountability. Under 29 CFR
541.5d (57 FR 37677; Aug. 19, 1992), an otherwise exempt public sector
employee does not lose exempt status under a regulated public sector
pay and leave system that requires partial-day (or hourly) deductions
from pay for employee absences not covered by accrued leave, or for
budget-driven furloughs.
Overview of Existing Requirements
The implementing regulations in part 541 contain specific criteria
that define each category of exemption provided by section 13(a)(1).
The applicability of any particular exemption is not presumed under the
FLSA, but must be affirmatively established. Job titles, nomenclature,
or job descriptions do not determine the exemptions, nor does paying a
``salary'' rather than an hourly rate. Rather, whether an exemption
applies depends on the specific duties and responsibilities of each
employee's job, how much salary the employee is paid, and whether the
salary is guaranteed without regard to the quality or quantity of work
performed, as defined by the regulations.
The duties tests differ for each category of exemption. Two
different salary (or fee) levels exist for each of the exemptions for
executive, administrative, and professional employees. The salary
requirements do not apply to certain licensed or certified doctors,
lawyers and teachers, or to outside sales employees. Employees paid
below the applicable lower salary rate are not exempt regardless of
their duties. Those paid above the higher (or
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``upset'') salary rate are exempt if they meet a ``short'' duties test.
Those paid between the higher and lower salary rates must meet a more
detailed ``long'' duties test.
The salary tests were originally designed to operate as a ready
guide to assist employers in deciding which employees were more likely
to meet the duties tests in the exemptions. In fact, the salary levels
specified in the regulations were once viewed as the best indicator of
exempt status. As last revised effective April 1, 1975, the salary
required for executive and administrative employees under the current
``long'' test is $155 per week; professional employees are exempt at
$170 per week. The short test salary level (requiring fewer duties to
be satisfied) for all three exemptions is $250 per week. Because these
salary levels have not been raised in 28 years, virtually all employees
are tested for exemption today under the ``short'' duties tests.
Moreover, while the existing salary tests ($155, $170, and $250 per
week) still reflect the interim 1975 rates, a full-time minimum wage
worker today earns $206 per week for a 40-hour work week. Consequently,
the existing salary tests no longer provide employees or employers any
help in distinguishing between bona fide executive, administrative, and
professional employees and those who should not be considered for
exemption. Moreover, the outdated salary tests and complex duties tests
in the current regulation cause employees to be erroneously
misclassified as exempt and thus not paid properly.
Under the currently applicable ``short'' test exemption
requirements, an exempt ``executive'' employee must be paid at least
$250 per week on a salary basis, have a primary duty to manage the
enterprise or a customarily recognized department or subdivision
thereof, and regularly direct the work of two or more other employees.
An exempt ``administrative'' employee must be paid at least $250 per
week on a salary or fee basis, have a primary duty of office or non-
manual work directly related to management policies or general business
operations of the employer or the employer's customers (or similar
functions in the administration of a school system or educational
institution in work directly related to academic instruction), and
perform work requiring the exercise of discretion and independent
judgment. An exempt ``professional'' employee must be paid at least
$250 per week on a salary or fee basis; have a primary duty of (1) work
requiring knowledge of an advanced type in a field of science or
learning customarily acquired by prolonged, specialized, intellectual
instruction and study, or (2) work that is original and creative in a
recognized field of artistic endeavor, or (3) teaching in a school
system or educational institution, or (4) work as a computer systems
analyst, computer programmer, software engineer, or other similarly-
skilled worker in the computer software field; and perform work
requiring the consistent exercise of discretion and judgment, or work
requiring invention, imagination, or talent in a recognized field of
artistic endeavor. Under the professional exemption, the salary or fee
requirement does not apply to certain licensed or certified doctors,
lawyers and teachers; or to certain computer-related occupations if
paid on an hourly basis at $27.63 or more per hour. An ``outside
sales'' employee who is customarily and regularly engaged away from the
employer's places of business making sales or obtaining orders or
contracts for services or use of facilities, and who does not exceed a
twenty percent tolerance per work week performing duties unrelated to
his or her own outside sales or solicitations, is exempt. There are no
salary or fee requirements for outside sales employees.
Employees meeting the foregoing requirements are excluded from the
Act's minimum wage and overtime protections. Thus, they may work any
number of hours in the work week and are not subject to the Federal
law's overtime pay requirements. Some state laws have stricter
exemption standards than those just described. The FLSA does not
preempt any such stricter State standards. If a State or local law
establishes a higher standard than the provisions of the FLSA, the
higher standard applies. See section 18 of the FLSA, 29 U.S.C. 218.
The executive and administrative exemptions apply generally to
certain management and staff-level positions within an employer's
organization. For example, department heads with management as their
primary duty, who regularly supervise two or more full time employees
in their department, may qualify as executives if they are paid a
predetermined salary of $250 or more per week. An administrative
employee must primarily perform office or nonmanual work of substantial
importance to the management of the business, but is not required to
supervise other employees. Persons with functional (rather than
departmental) management authority, or who perform ``staff'' rather
than production or sales work, may qualify as administrative employees
if their duties include ``discretion and independent judgment'' or
decision-making responsibilities on important matters in managing the
employer's general business operations (e.g., if they primarily
determine or affect management policies in a particular area, such as
credit, personnel, or labor relations). Executive assistants delegated
decision-making authority to carry out parts of an exempt executive or
administrative employee's management responsibilities may also qualify
as exempt administrative employees.
The professional exemption (aside from the artistic, teaching, and
computer-related categories) applies to the recognized professions
requiring advanced knowledge in a field of science or learning
customarily acquired by a prolonged course of specialized intellectual
instruction and study (i.e., the ``learned'' professions, such as
doctor, lawyer, architect, engineer, etc.), and is typically
characterized by possession of the appropriate academic degree for the
particular profession. Outside sales employees must regularly work away
from their employer's place of business making sales or obtaining
orders or contracts; they may not exceed a 20 percent tolerance for
performing duties unrelated to their own outside sales work. ``Inside
sales'' employees are not included within the scope of the exemption
for ``outside sales'' employees.
Under the regulatory ``salary basis'' test codified at 29 CFR
541.118, partial-day deductions from pay based on the number of hours
worked (``pay-docking'') are generally not allowed in the private
sector (unless made in the first or last weeks of employment or due to
unpaid leave taken pursuant to the Family and Medical Leave Act, 29
U.S.C. 2601 et seq.). Disciplinary deductions from pay also violate the
``salary basis'' test (except for safety rules of major significance,
such as no-smoking rules in oil refineries and coal mines). These
concepts clarify the intended meaning of the requirements for payment
of a guaranteed salary--i.e., the predetermined salary amount may not
be reduced because of variations in either the quality or quantity of
the work performed by the employee. Pay practices not meeting the
guaranteed ``salary basis'' requirements cause the exemption to be
declared inapplicable, in some cases for entire classes of
employees.\11\
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\11\ As noted, a special rule applies to employees of public
agencies paid according to regulated pay and leave systems that
require deductions for partial-day absences not covered by accrued
leave, and for budget-driven furloughs (see 29 CFR 541.5d).
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Public Commentary and the GAO Report
Suggested changes to the part 541 regulations have been the subject
of extensive public commentary for years, including a report issued by
the General Accounting Office (GAO) in September 1999.\12\ In this
report, GAO chronicled the background and history of the exemptions,
estimated the number of workers who might be included within the scope
of the exemptions, identified the major concerns of employers and
employees regarding the exemptions, and suggested possible solutions to
the issues of concern raised by the affected interests. In general, the
employers contacted by GAO were concerned that the regulatory tests are
too complicated, confusing, and outdated for the modern work place, and
create potential liability for violations when errors in classification
occur.\13\
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\12\ Fair Labor Standards Act: White Collar Exemptions in the
Modern Work Place (GAO/HEHS-99-164, September 30, 1999).
\13\ Under the FLSA, employees may sue their employer
(individually or collectively) for up to two, or in some cases
three, years of back wages, plus an equal amount in liquidated
damages and attorney fees and court costs, for violations of the
FLSA's minimum wage and overtime requirements.
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Employers were particularly concerned about potential liability for
violations of the complex ``salary basis'' test and the exacting
requirements of the so-called ``no-docking'' rule, which has been the
focus of lawsuits against employers in recent years brought
collectively by groups of highly paid managerial and professional
employees. This test in effect limits employers' ability to ``dock''
exempt employees'' pay for partial-day personal absences and
disciplinary violations, which limits employers' ability to hold exempt
employees accountable for their time and actions. In addition,
employers believed that limiting the administrative and professional
exemptions to ``nonproduction'' employees did not account for the
effects of modern technology on employment today. They also noted the
traditional limits of the exemptions have blurred in the modern work
place, citing highly skilled and highly paid technical workers without
college degrees who do not qualify as exempt professionals but who
perform essentially the same job as exempt engineers who have the
required academic degrees. Manufacturing employers pointed to new
technology used in factories, which requires advanced technical skills
but far less traditional ``manual'' labor. They also told GAO that,
while these workers may have to follow precise written guidelines to
perform their work, prescribed procedures were important to modern
quality control. Employers also believed adherence to precise written
guidelines--one major distinction between exempt and nonexempt workers
under the existing regulations--is necessary in a modern, efficient
work place. Employers also complained that the discretion and
independent judgment requirements for administrative and professional
employees are confusing and applied inconsistently by Wage and Hour
Division investigators in classifying similarly-situated employees, and
are particularly difficult to apply. Thus, employers were unsure how to
classify administrative personnel. GAO's discussions with employers and
Wage and Hour Division investigators, and its review of compliance
cases, confirmed that this part of the duties test involved
particularly difficult and subjective determinations, for both the
employers and the investigators, and that it was a source of contention
in Department audits.
Employee representatives contacted by GAO, in contrast, were most
concerned that the use of the exemptions be limited to preserve
existing overtime work hour limits and the 40-hour standard work week
for as many employees as possible. They believed the tests have become
weakened as applied today by judicial rulings and do not adequately
restrict employers' use of the exemptions. When combined with the low
salary test levels, the employee representatives felt that few
protections remain, particularly for low-income supervisory employees.
They believed that inflation has severely eroded the salary-level
limitations originally envisioned by the regulations. Because of
inflation, according to the employee representatives, the current
salary test levels are now near the minimum wage level, rendering
application of the regulations to the current work force virtually
meaningless.
GAO's report noted that the conflicting interests affected by these
rules have made consensus difficult and that, since the FLSA was
enacted, the interests of employers to expand the white collar
exemptions have competed with those of employees to limit use of the
exemptions. To resolve the issues presented, GAO suggested that
employers' desires for clear and unambiguous regulatory standards must
be balanced with employees' desires for fair and equitable treatment in
the work place. The GAO recommended that the Secretary of Labor
comprehensively review the regulations and restructure the exemptions
to better accommodate today's workplace and to anticipate future work
place trends.
The House Subcommittee on Workforce Protections of the Committee on
Education and the Workforce held a hearing in May 2000 to receive
testimony from GAO and other interested parties on GAO's September 1999
report. Testimony provided by the GAO, representatives of business and
labor organizations, and the Department of Labor confirmed GAO's
assessment of the issues and the difficulty in moving forward with
constructive changes due to the differing views of the many affected
and interested parties, and the potential impact of possible changes.
Representatives of worker interests opposed making changes that would
remove overtime protections for workers now covered, while business
interests and employer groups advocated modernizing the regulations to
exempt more classifications of workers from overtime pay.
III. Summary of Current Regulatory Proposal
Structure and Organization
Part 541 presently contains two subparts. Subpart A provides the
regulatory tests that define each category of the exemption (executive,
administrative, professional, and outside sales). Subpart B provides
interpretations of the terms used in the exemptions. Subpart B was
first issued as an explanatory bulletin effective in January 1950 to
provide guidance to the public on how the Wage and Hour Division
interpreted and applied the exemption criteria when enforcing the FLSA.
The Department proposes to eliminate the current distinction between
the ``regulations'' in subpart A and the ``interpretations'' in subpart
B. This will consolidate and streamline the regulatory text, reduce
redundancies, and make the regulations more understandable and easier
to decipher when applying them to particular factual situations,
providing much-requested simplification. In addition, eliminating the
distinction between the subpart A ``regulations'' and the subpart B
``interpretations'' will eliminate confusion regarding the appropriate
level of deference to be given to the provisions in each subpart.
The proposed rule reorganizes the subparts according to each
category of exemption, and consolidates common elements (such as a new
subpart containing common definitions), in order to eliminate
unnecessary duplication and repetition of regulatory
[[Page 15564]]
text. Thus, after several introductory provisions in subpart A, the
proposed new subpart B would pertain to the executive exemption;
subpart C would pertain to the administrative exemption; subpart D
would pertain to the professional exemption; subpart E would contain
provisions regarding computer employees; and subpart F would contain
provisions regarding outside sales employees. The proposed subpart G
would include provisions regarding salary requirements applicable to
most of the exemptions, including salary levels and the salary basis
test. Subpart G would also include a section on highly compensated
employees. Proposed subpart H would contain definitions and other
miscellaneous provisions applicable to all or several of the
exemptions. Finally, numerous editorial changes are proposed throughout
the rule to streamline and improve its clarity, delete outdated
references and illustrations, and remove gender-specific references.
Current section 541.6, entitled ``Petition for amendment of
regulations,'' has been deleted in this proposed rule. The substance of
that section, originally adopted in 1938 and providing for interested
persons to petition the Administrator for desired changes in these
regulations, has been superseded and supplanted by enactment of the
Administrative Procedure Act, 5 U.S.C. 553(e).
Finally, the proposed rule deletes a number of discussions
regarding application of the exemption to specific occupations. These
discussions appeared to be outdated, relating to occupations and duties
which may not exist in the 21st century economy. However, because most
stakeholders find such examples useful in applying the regulations to
specific occupations, we invite comments on specific occupations and
duties which should be discussed in the regulations. In particular, we
invite comments on occupations the exempt status of which has been the
subject of confusion and litigation including but not limited to
pilots, athletic trainers, funeral directors, insurance salespersons,
loan officers, stock brokers, hotel sales and catering managers, and
dietary managers in retirement homes. The Department anticipates that
the final rule will include additional provisions on the application of
the exemptions to such borderline occupations, but requires more
information about the particular job duties and responsibilities
generally found in such occupations. We invite comments on which
occupations should be included in the final rule and whether such
occupations should be treated as exempt or nonexempt, including
detailed information about job duties in such occupations.
Subpart A, General Regulations, Sec. Sec. 541.000--.002
The current regulations have several general, introductory
provisions scattered in various locations. The proposed regulations
would gather these provisions together into proposed subpart A. Thus,
the proposed section 541.000 combines an introductory statement
currently located at section 541.99 and information currently located
at section 541.5b regarding the application of the equal pay provisions
in section 6(d) of the FLSA to employees exempt from the minimum wage
and overtime provisions of the FLSA under section 13(a)(1). Proposed
section 541.000 also contains new language to reflect legislative
changes to the FLSA regarding computer employees and information
regarding the new organizational structure of the proposed regulations.
Proposed section 541.001 relocates definitions of ``Act'' and
``Administrator'' from their current location in section 541.0.
Finally, proposed section 541.002 contains a general statement that job
titles alone are insufficient to establish the exempt status of an
employee. This fundamental concept, equally applicable to all the
exemption categories, currently appears in section 541.201(b) regarding
administrative employees.
Subpart B, Executive Employees, Sec. Sec. 541.100--.107
To qualify as an exempt executive under the current regulations, an
employee must be compensated on a salary basis at a rate of not less
than $155 per week and meet the ``long'' duties test, or at a rate of
not less than $250 per week and meet an abbreviated ``short'' duties
test. The long test requires that an exempt executive employee: Have a
primary duty of managing the enterprise (or a recognized department or
subdivision thereof); customarily and regularly direct the work of two
or more other employees; have authority to hire or fire other employees
or have particular weight given to suggestions and recommendations as
to hiring, firing, advancement, promotion or other change of status;
customarily and regularly exercise discretionary powers; and devote no
more than 20 percent (or as much as 40 percent in retail or service
establishments) of hours worked per week to activities that are not
directly and closely related to performing exempt managerial work. The
percentage restrictions on performing nonexempt work in the long test
do not apply to an employee who is in sole charge of an independent or
physically separate branch establishment, or to an owner of at least a
20 percent interest in the enterprise in which the employee is
employed. The executive short duties test requires that the employee
have a primary duty of managing the enterprise (or a recognized
department or subdivision thereof) and customarily and regularly direct
the work of two or more other employees.
The proposed regulations would streamline the current regulations
by eliminating the separate long and short tests, and substituting a
single standard duties test in proposed Sec. 541.100. The proposed
standard duties test would provide that an exempt executive employee
must: (1) Have a primary duty of managing the enterprise in which the
employee is employed or of a customarily recognized department or
subdivision thereof; (2) customarily and regularly direct the work of
two or more other employees; and (3) have the authority to hire or fire
other employees or have particular weight given to suggestions and
recommendations as to the hiring, firing, advancement, promotion or any
other change of status of other employees. This standard test,
consisting of the current short test requirements plus a third
objective requirement taken from the long test, represents a middle
ground between the current long and short tests.
This streamlining and simplification of the current executive
exemption regulations will eliminate the long test subsections
regarding the percentage restrictions on nonexempt work and the
discretionary powers requirement. We propose to eliminate these
subsections for several reasons. Because of its outdated salary level,
the long test has, as a practical matter, not been operative for many
years. Reintroducing its requirements now would add new complexity and
burdens to the exemption tests. The tests are complex and require time-
testing managers for the duties they perform, hour-by-hour in a typical
work week. Employers are not generally required to maintain any records
of daily or weekly hours worked by exempt employees (see 29 CFR 516.3),
let alone perform a moment-by-moment examination of an employee's
specific duties performed or discretionary powers exercised. Yet
reactivating the long test's limitations on nonexempt work could impose
such significant new monitoring requirements (and, indirectly, new
recordkeeping burdens) for employers to analyze the substance of each
particular
[[Page 15565]]
employee's daily and weekly tasks in order to be confident of any
claimed exemption. Further, historically, deciding which specific
activities were not inherently an ``essential part of and necessarily
incident to'' the exempt work proved to be a subjective and difficult
standard to apply for employers, employees, as well as Wage and Hour
Division investigators. The discretionary powers test has similarly
proved to be a subjective and difficult standard to apply. Moreover,
making such finite determinations would be made even more difficult in
the aftermath of the decisions in Donovan v. Burger King, Corp., 675
F.2d 516 (2nd Cir. 1982), Donovan v. Burger King Corp., 672 F.2d 221
(1st Cir. 1982), and similar judicial rulings which hold that an exempt
employee's managerial duties can be carried out at the same time the
employee performs nonexempt manual tasks. Accordingly, given these
developments in judicial construction of the law, the Department is of
the view that the discretionary powers provision and the percentage
limitations on particular duties formerly applied under the now dormant
long test are not useful criteria that should be reintroduced for
defining the executive exemption in today's work place.
The proposed regulations at Sec. 541.101 would recognize as an
exempt executive any employee who owns at least a 20 percent equity
interest in the enterprise in which the employee is employed. Section
541.102 of the proposed regulations would continue the principle that
an employee in ``sole charge'' of an independent establishment or a
physically separated branch establishment may qualify as an exempt
executive. ``Sole charge'' of an establishment is defined to include
the senior employee with authority to make decisions regarding day-to-
day operations and to direct the work of other employees. These
provisions appear in the current regulations as exceptions to the
percentage restrictions on non-exempt work under the former long test,
in recognition of the due weight to be given the freedom from direct
supervision and the high degree of executive responsibility enjoyed by
the top person in charge of a separate business location, as well as
the special status of a partial equity owner of an enterprise. The
Department believes that these continue to be valid concepts for
special status as executives under the proposed restructured
regulations as well. The Department seeks comments on whether the
salary level and/or salary basis requirements should be eliminated as
unnecessary for sole charge executives and business owners. We have
proposed to eliminate those requirements only for the 20 percent owner,
based upon our belief that such an individual likely will share in the
profits of the enterprise and that this is an adequate substitute
indicator of exempt status.
The proposed regulations also would reorganize, simplify,
streamline and update the regulations in other ways. The proposed
regulations utilize objective, plain language in an attempt to make the
regulations understandable to employees and employee representatives,
small business owners and human resource professionals. We also propose
to eliminate outdated and uninformative examples and to update
definitions of key terms and phrases. The proposed regulations would
move a number of sections pertaining to salary issues (current
Sec. Sec. 541.117, 541.118) to a new subpart G (discussed below),
where all such provisions will be consolidated. Other sections relevant
to several or all of the exemption categories (such as the definition
of primary duty and a section regarding application of the exemptions
to trainees) would move to a proposed new subpart H (Definitions and
Miscellaneous Provisions) to eliminate unnecessary repetition. The
following sections of the current regulations have been edited and
moved to proposed new subpart H:
------------------------------------------------------------------------
Proposed
Current Section . . . Moved to . . . section
------------------------------------------------------------------------
541.101 General.............................................. 541.702
541.103 Primary duty......................................... 541.700
541.108 Work directly and closely related.................... 541.703
541.109 Emergencies.......................................... 541.705
541.110 Occasional tasks..................................... 541.706
541.111 Nonexempt work generally............................. 541.702
541.116 Trainees............................................. 541.704
------------------------------------------------------------------------
Section 541.102 of the current regulations, entitled
``Management,'' has been modified and moved to proposed section
541.103.
Section 541.115 of the current regulations, entitled ``Working
foremen,'' has been moved to proposed Sec. 541.106 and renamed,
``Working supervisors,'' although no substantive changes are intended.
A new provision on supervisors in retail establishments has been added
as proposed Sec. 541.107. Both 541.106 and 541.107 address the
difficult issue of classifying employees who have both exempt
supervisory duties and non-exempt duties, and the Department invites
comments on whether these sections have appropriately distinguished
exempt and non-exempt employees. Section 541.106 provides, as in the
current regulation, that an employee with a primary duty of ordinary
production work is not exempt even if the employee also has some
supervisory responsibilities. This situation often occurs in a factory
setting where a collective bargaining unit employee who works on a
production line also has some responsibility to direct the work of
other bargaining unit employees. Another example is a police officer
who directs the work of other police officers on the conduct of an
investigation but is also a member of a bargaining unit. Bargaining
unit members do not become exempt employees simply because they are
given some supervisory responsibilities.
The definition of the term ``department or subdivision'' remains at
Sec. 541.104, and the definition of ``two or more employees'' remains
at Sec. 541.105. The Department invites comments on whether the
supervision of ``two or more employees'' required for exemption should
be modified to include ``the customary or regular leadership, alone or
in combination with others, of two or more other employees.''
Section 541.106 of the current regulations, entitled ``Authority to
hire or fire,'' is proposed to be deleted. The text in this section
does not contribute to any further explanation of the requirement, and
no further explanation seems necessary. Section 541.107 of the current
regulations, entitled ``Discretionary powers,'' and Sec. 541.112 of
the current regulations, ``Percentage limitations on nonexempt work,''
are also deleted from the proposed rule for the reasons discussed
above.
Subpart C, Administrative Employees, Sec. Sec. 541.200-.207
To qualify as an exempt administrative employee under the current
regulations, an employee must be paid on a salary or fee basis at a
rate of not less than $155 per week and meet the ``long'' duties test,
or earn $250 per week and meet the ``short'' duties test. The long test
requires that an exempt administrative employee have a primary duty of
either performing office or non-manual work directly related to
management policies or general business operations of the employer or
the employer's customers; or performing functions in the administration
of a school system, or educational establishment or institution, in
work directly related to academic instruction or training. In addition,
the current regulations require that an administrative employee:
Customarily and regularly exercise discretion and
[[Page 15566]]
independent judgment; regularly and directly assist another exempt
employee or perform work along specialized or technical lines requiring
special training, experience or knowledge under only general
supervision or perform special assignments and tasks under only general
supervision; and devote no more than 20 percent (or as much as 40
percent in retail or service establishments) of work hours in a week to
activities that are not directly and closely related to the performance
of exempt work. The short test requires that the employee have a
primary duty of performing office or non-manual work directly related
to management policies or general business operations, which must
include work requiring the exercise of discretion and independent
judgment. Under both tests, when considering whether an employee's work
is ``directly related to management policies or general business
operations'' the regulations and the courts assess whether the work is
``related to the administrative operations of the business as
distinguished from production''--known as the ``production versus staff
dichotomy''--and whether the work is ``of substantial importance to the
management or operation of the business.''
The current duties test for administrative employees is the most
difficult to apply of all the duties tests. The requirement that the
employee exercise ``discretion and independent judgment,'' for
instance, has generated significant confusion and litigation, as noted
in the GAO report discussed above. This rule has been interpreted to
deny the exemption to an employee who follows a procedures manual, even
though most employees in the modern workplace are required to operate
within standard procedures. The ``production versus staff dichotomy''
also is difficult to apply uniformly in the 21st century workplace.
The proposed regulations at Sec. 541.200 would retain the
requirement that an exempt administrative employee have a ``primary
duty'' of ``performing office or non-manual work related to the
management or general business operations of the employer or the
employer's customers,'' but replace the ``discretion and independent
judgment'' requirement with a new requirement that the employee hold
``a position of responsibility'' with the employer.
The primary duty requirement of ``performing office or non-manual
work related to the management or general business operations'' is
defined in a new Sec. 541.201. New Sec. 541.201 clarifies that this
requirement refers to the type of work performed by the employee and
includes an illustrative list of the types of work areas that meet this
requirement: tax, finance, accounting, auditing, quality control,
purchasing, procurement, advertising, marketing, research, safety and
health, personnel management, human resources, employee benefits, labor
relations, public relations, government relations and similar
activities. The Department invites comments on any other areas that
should be included in this list and on any areas that should be
deleted. Like the proposed changes to the executive exemption, the
proposed administrative exemption focuses on ``primary duty'' and
eliminates the percentage restrictions on non-exempt work currently
required by the now-inoperative long duties test, for the same reasons
discussed above under the executive exemption.
The proposed rule would also reduce the emphasis on the so-called
``production versus staff'' dichotomy in distinguishing between exempt
and non-exempt workers, while retaining the concept that an exempt
administrative employee must be engaged in work related to the
management or general business operations of the employer or of the
employer's customers. These changes are needed to reflect emerging case
law in this area. For example, the court in Piscione v. Ernst & Young,
171 F.3d 527 (7th Cir. 1999), examined whether an employee's duties
were directly related to Ernst & Young's management policies or general
business operations or those of the firm's clients. The employee worked
as a consultant in the firm's Human Resources Consulting Group on
several multi-million dollar defined benefit plans and defined
contribution plans in which thousands of individuals participated. The
employee's work involved benefits calculations, actuarial valuations,
government filings, compliance testing, and client advice. The court
stated that this work influenced the internal business operations and
policies of Ernst & Young's clients with regard to their benefit plans.
The employee was the primary contact for several clients; the employee
identified problems with their plans and suggested solutions, and the
employee offered suggestions to clients regarding how to improve their
efficiency. The court rejected the argument that, because the employee
provided clients with reports and government forms to file, the work
was production work. Rather, the employee was an advisory specialist or
consultant whose work was exempt. In addition, the court found that the
employee contributed to the management policies of Ernst & Young
because the employee played a major role in developing new methods for
improving client services and the timeliness of firm operations.
The proposed Sec. 541.200 also contains a second requirement for
the administrative exemption relating to the importance of the work
performed or the high level of competence required by the work
performed--a requirement that an exempt employee must hold a ``position
of responsibility.'' The term ``position of responsibility'' is defined
in the proposed regulations at new Sec. 541.202. To meet this new
``position of responsibility'' requirement, an employee must either (1)
perform work of substantial importance, or (2) employ a high level of
skill or training. The concept of ``work of substantial importance''
has been in the interpretive regulations since 1950, as a factor for
determining whether a worker is an exempt administrative employee. The
proposed regulations at new Sec. 541.204 define this phrase based on
language in the current regulations and include a revised list
illustrating the types of activities that are generally considered of
``substantial importance'' for purposes of the exemption including:
Formulating or interpreting management policies; providing consultation
and expert advice to management; making or recommending decisions that
have a substantial impact on business operations or finances; analyzing
and recommending changes to operating practices; planning long or
short-term business objectives; analyzing data, drawing conclusions and
recommending changes; and handling complaints, arbitrating disputes or
resolving grievances. The Department invites comments on any additional
activities that should be included in this list and on any activities
that should be deleted. The second alternative for meeting the
``position of responsibility'' requirement, ``work requiring a high
level of skill or training,'' defined in the proposed regulations at
new Sec. 541.205, would ensure that the administrative exemption is
not denied to a highly trained and skilled employee who performs
administrative functions merely because the employee uses a procedures
manual, so long as the manual contains information that can only be
interpreted properly by someone with a high level of specialized skills
or training, as opposed to a manual in which the employee simply looks
up the correct answer for a particular set of circumstances. As
reflected in the GAO report noted above,
[[Page 15567]]
it has become commonplace for employees in the modern work place to use
procedures manuals and written guidelines as standard practices for
achieving quality control and efficiency.
The administrative exemption is the most challenging of the Sec.
13(a)(1) exemptions to define and delimit, and the ``discretion and
independent judgment'' requirement has become increasingly difficult to
apply with uniformity in the 21st century workplace. Thus, the
Department proposes to delete this requirement and replace it with the
requirement that an employee hold a ``position of responsibility.'' The
Department specifically seeks comments on whether the ``discretion and
independent judgment'' requirement should be deleted entirely, retained
as a third alternative for meeting the ``position of responsibility''
requirement, or retained by itself but modified to provide better
guidance on distinguishing exempt administrative employees. The
Department invites commenters to submit alternative proposed regulatory
language for either ``discretion and independent judgment'' or
``position of responsibility.'' The Department solicits comment on how
employers currently interpret the ``discretion and independent
judgment'' requirement, and whether individuals currently exempt under
that requirement would continue to be exempt under the new ``position
of responsibility'' requirement.
Finally, the proposed regulations also would reorganize, simplify,
streamline and update the regulations in other ways. The proposed
regulations utilize objective, plain language; eliminate outdated and
uninformative examples; and update definitions of key terms and
phrases. As with the executive exemption, the proposal for the
administrative exemption would move a number of sections pertaining to
salary issues (current Sec. Sec. 541.211, 541.212 and 541.213) to
subpart G, and other sections relevant to several or all of the
exemption categories would move to the proposed subpart H (Definitions
and Miscellaneous Provisions) to eliminate unnecessary repetition. For
example, current Sec. 541.203 entitled ``Nonmanual work'' is moved to
proposed new Sec. 541.703. Current Sec. 541.206 entitled ``Primary
duty'' is merged with current Sec. 541.103 and moved to proposed new
Sec. 541.700. Current Sec. 541.208 entitled ``Directly and closely
related'' is combined with current Sec. Sec. 541.108, 541.202, and
541.307 and moved to proposed new Sec. 541.702. Current Sec. 541.210
entitled ``Trainees, administrative'' is combined with current Sec.
541.116 (``Trainees, executive'') and current Sec. 541.310
(``Trainees, professional'') and moved to proposed new Sec. 541.704.
Provisions related to the administration of educational institutions in
current Sec. Sec. 541.2, 541.201(c), 541.202(e), and 541.215 have been
consolidated and moved to new Sec. 541.206; no substantive changes are
intended by this consolidation.
Subpart D, Professional Employees, Sec. Sec. 541.300-.304
The current regulations pertaining to the professional exemption
contain four separate categories of exempt employees: learned
professionals, artistic professionals, teachers, and computer
professionals. As with the executive and administrative exemptions, the
regulations contain both ``short'' and ``long'' duties tests, depending
upon the salary level of the employee. The long test contains a
separate primary duty requirement for each of the four categories of
employees. The long test for learned professionals requires that the
primary duty consist of work requiring knowledge of an advanced type in
a field of science or learning customarily acquired by a prolonged
course of specialized intellectual instruction and study, as
distinguished from a general academic education and from an
apprenticeship, and from training in the performance of routine mental,
manual, or physical processes. For creative professionals, the primary
duty must consist of work that is original and creative in character in
a recognized field of artistic endeavor (as opposed to work which can
be produced by a person endowed with general manual or intellectual
ability and training), and the result of which depends primarily on the
invention, imagination, or talent of the employee. For teachers, the
primary duty must consist of teaching, tutoring, instructing, or
lecturing in the activity of imparting knowledge by an employee who is
employed and engaged in this activity as a teacher in the school system
or educational establishment or institution by which the person is
employed. The duties tests for computer employees are discussed in
subpart E. The long test also requires that an exempt employee: Perform
work requiring the consistent exercise of discretion and judgment; do
work that is predominantly intellectual and varied in character, such
that the output produced or the result accomplished cannot be
standardized in relation to a given period of time; and devote no more
than 20 percent of work hours in a week to activities that are not an
essential part of and necessarily incident to exempt work. The short
test in the current regulations for both learned professionals and
teachers contains the specific primary duty requirement discussed
above, and requires that the employee perform work requiring the
consistent exercise of discretion and judgment. For artistic
professionals, the work must require invention, imagination or talent
in a recognized field of artistic endeavor.
The proposed regulations pertaining to the professional employee
exemption would make changes similar to those we propose for the
executive and administrative exemptions. The goal is to clarify and
simplify the regulations defining the professional employee exemption,
while remaining consistent with the purposes of the FLSA. For ease of
reference, and making no substantive changes, we propose to move the
provisions pertaining to computer professionals to new subpart E, which
will contain all information pertinent to such employees. We also
propose to simplify the regulations by eliminating the separate short
and long tests for each of the remaining three categories and
substituting a single standard duties test for each. This restructuring
and simplification would eliminate the percentage limitation on
nonexempt work and the consistent exercise of discretion and judgment
requirement. As discussed above in connection with similar proposed
changes to the executive and administrative exemptions, we are
proposing to eliminate these subsections because they have proven
difficult standards to apply uniformly.
For learned professionals, the proposed new standard test in Sec.
541.301 would provide that employees qualify for exemption as a learned
professional if they have a primary duty of performing office or non-
manual work requiring advanced knowledge in a field of science or
learning customarily acquired by a prolonged course of specialized
intellectual instruction, but which also may be acquired by an
equivalent combination of intellectual instruction and work experience.
This proposed standard test for learned professionals would focus on
the knowledge of the employee and how that knowledge is used in
everyday work, not on the educational path followed to obtain that
knowledge. Although some flexibility to focus on the worker's knowledge
exists in the current regulation, it is very limited and rarely used.
The clarified test reflects changes in the 21st century workplace in
how some ``knowledge workers'' acquire specialized learning and skills:
in the modern workplace, some
[[Page 15568]]
employees acquire advanced knowledge through a combination of formal
college-level education, training and work experience, even where other
employees in that field customarily acquire advanced knowledge by
obtaining a baccalaureate or advanced degree. The proposed changes
would clarify that, so long as such an employee's level of advanced
knowledge is equivalent to the knowledge possessed by an employee with
the typical academic degree generally required by the profession, the
employee may qualify as an exempt professional. Thus, for example, an
employee who obtained advanced knowledge by completing college courses
in a field such as engineering, and who worked in that field for a
number of years, could qualify for exemption if the knowledge acquired
was equivalent to that of an employee with a baccalaureate degree in
engineering. We have not proposed any specific formula in the
regulations for determining the equivalencies of intellectual
instruction and qualifying work experience, although some examples from
the current rule have been included and expanded. Public comments are
invited on whether the regulations should specify such equivalencies.
The view that several years of specialized training plus intensive
on-the-job training for a number of additional years may be equated
with a college degree in certain fields has found support in reported
judicial decisions. For example, the professional exemption has been
applied to employees with a combination of training and academics in
Leslie v. Ingalls Shipbuilding, Inc., 899 F. Supp. 1578 (D. Miss.
1995). In Leslie, the court concluded that an employee who had
completed three years of engineering study at a university and had many
years of experience in the field of engineering was properly classified
as a professional employee, even though the employee did not satisfy
one of the usual minimum qualifications for an engineering position of
having a bachelor's degree in an engineering discipline. The court
considered the employee's combination of education and experience as
satisfying the requirement for a prolonged course of specialized
intellectual instruction and study.
For creative professionals, we propose to adopt the current short
test, slightly modified, as the new standard test in proposed Sec.
541.302. This new standard test would apply the creative professional
exemption to any employee with the primary duty of ``performing work
requiring invention, imagination, originality or talent in a recognized
field of artistic or creative endeavor.'' This language, although
simplified, is not intended to make any material changes from the
existing regulations. This standard was applied in the case of Freeman
v. National Broadcasting Company, Inc., 80 F.3d 78 (2nd Cir. 1996), in
which employees who researched facts, developed story elements,
interviewed subjects, wrote scripts, and supervised the editing of
videotape were deemed to have been correctly classified as artistic
professional employees. On the other hand, employees of small news
organizations who spent their time gathering facts about routine
community events such as municipal, school board, and city council
meetings, and gathering information from the police blotter and real
estate transaction reports, and then reporting those facts in a
standard format were deemed not to be artistic professional employees
in Reich v. Newspapers of New England, 44 F.3d 1060 (1st Cir. 1995) and
Reich v. Gateway Press, Inc., 13 F.3d 685 (3d Cir. 1994).
The standard test for teachers in proposed section 541.303 would be
unchanged from the current short test, with the exception of the
deletion of the requirement that the employee's work require the
consistent exercise of discretion and judgment, a requirement that, as
discussed above, has engendered significant confusion. Provisions on
teachers from current Sec. Sec. 541.3, 541.301(g), and 541.314 have
been consolidated into proposed new Sec. 541.303. The minor editorial
changes are not intended to cause any substantive changes.
In addition, the proposed regulations utilize objective, plain
language that can be easily understood by employees, small business
owners and human resource professionals, and eliminate outdated and
uninformative examples. The proposed regulations also would address a
number of specific occupations that have been the subject of ambiguity
and litigation. For example, we propose to update and clarify the
circumstances under which employees working as newspaper journalists or
as radio or television commentators are exempt, because the case law
regarding such employees has been evolving over the years, and the
existing regulations discussing such employees are outdated.
Provisions of the current regulations in Sec. Sec. 541.3 and
541.314 that provide an exception to the salary or fee requirements for
physicians and lawyers have been consolidated and moved to proposed
Sec. 541.304. Current Sec. 541.307 entitled ``Essential part of and
necessarily incident to'' has been combined with current Sec. 541.108
(``Work directly and closely related''), 541.202 (``Categories of
work''), and Sec. 541.208 (``Directly and closely related''), and
moved to proposed new Sec. 541.702 (``Directly and closely related''),
for a streamlined discussion of the principles for distinguishing
exempt and nonexempt work. Although these sections have been
consolidated and simplified, we do not intend any substantive changes.
Finally, we propose to move sections that pertain to salary issues
(Sec. Sec. 541.311, 541.312 and 541.313) to subpart G, where all such
issues will be consolidated. Other sections relevant to several or all
of the exemption categories (such as the definition of primary duty, a
section regarding application of the exemption to trainees, and a
section discussing nonexempt work generally) would move to the proposed
subpart H (Definitions and Miscellaneous Provisions) to eliminate
unnecessary repetition. Current Sec. 541.305 entitled ``Discretion and
judgment'' and current Sec. 541.309 entitled ``20-percent nonexempt
work limitation'' have been deleted from the proposed regulations for
the same reasons similar changes are being proposed in the executive
and administrative exemptions as discussed above.
Subpart E, Computer Employees Exemption, Sec. Sec. 541.400-.403
The exemption for employees in computer occupations has a unique
legislative and regulatory history. Prior to 1991, the interpretative
regulations acknowledged that employees in various computer-related
occupations could have supervisory or managerial duties meeting the
exemption for ``executive'' or ``administrative'' employees, provided
that all the applicable regulatory tests were otherwise met. However,
the regulations did not recognize computer employees as exempt
``learned'' professionals absent a showing that specialized, prolonged
academic education and training was an essential prerequisite for entry
into the computer field. At the time, colleges and universities did not
consistently recognize computer sciences as a bona fide academic
discipline under which standard licensing, certification, or
registration procedures were being followed. Thus, before 1990,
employees in computer occupations were rarely recognized as exempt
``learned'' professionals and many also did not perform duties
[[Page 15569]]
meeting all the requirements for the executive or administrative
exemptions. Of course, much has changed since then, and today
``computer scientists'' who possess advanced academic degrees in the
computer field are routinely recognized as exempt professionals.
In November 1990, Congress enacted legislation directing the
Department to issue regulations permitting computer systems analysts,
computer programmers, software engineers, and other similarly-skilled
professional workers to qualify for exemption under FLSA section
13(a)(1). This enactment also extended the exemption to employees in
such computer occupations if paid on an hourly basis at a rate at least
6\1/2\ times the minimum wage. Final implementing regulations were
issued in 1992 following public notice and comment procedures (see 29
CFR 541.3(a)(4) and 541.303; 57 FR 46744, Oct. 9, 1992; 57 FR 47163,
Oct. 14, 1992). However, when Congress increased the minimum wage in
1996, that law included some of the Department's regulatory language as
a separate statutory exemption under a new FLSA section 13(a)(17). The
1996 enactment also froze the hourly compensation test at $27.63 (which
equaled 6\1/2\ times the former $4.25 minimum wage). The original 1990
statute was not affected by the 1996 enactment.
Accordingly, under the current regulations, an exempt computer
employee must have a primary duty of performing work requiring
theoretical and practical application of highly-specialized knowledge
in computer systems analysis, programming, or software engineering. In
addition, an exempt computer employee must be engaged in performing
these activities as a computer systems analyst, computer programmer,
software engineer, or other similarly-skilled worker in the computer
software field. Finally, under the current regulations, an exempt
computer employee must consistently exercise discretion and judgment,
and be paid not less than $250 per week on a salary basis or not less
than $27.63 an hour if paid an hourly rate.
The proposed regulations would consolidate and condense all of the
regulatory guidance on the computer occupations exemption into a new
regulatory subpart E by combining provisions of the current regulations
found at Sec. Sec. 541.3(a)(4), 541.205(c)(7), and 541.303. This new
subpart will collect in one place the substance of the original 1990
enactment, the 1992 final regulations, and the 1996 enactment. The key
regulatory language that resulted from the 1990 enactment is now
substantially codified in section 13(a)(17) of the Act, and thus no
substantive changes have been made to that language. However,
consistent with changes in the professional exemption, the proposal
deletes the additional requirement that an exempt computer employee
must consistently exercise discretion and judgment. Further, the former
regulatory text has been edited and streamlined to provide a more
concise presentation, and the structure has been modified to conform to
similar changes proposed in the professional exemption. Because of the
tremendously rapid pace of significant changes occurring in the
information technology industry, we have avoided citing specific job
titles as examples of exempt workers, as they tend to quickly become
outdated once included in the regulatory text. The Department
recognizes that the computer employee exemption has been particularly
confusing, and invites comments on any further clarifications possible
under the statute.
Subpart F, Outside Sales Employees, Sec. Sec. 541.500-.504
Section 13(a)(1) of the FLSA contains a specific and separate
exemption for any employee employed ``in the capacity of outside
salesman.'' Under the existing regulations, outside sales employees
must be customarily and regularly engaged away from the employer's
places of business making sales or obtaining orders or contracts for
services or the use of facilities. (``Inside sales'' employees are not
within the scope of this statutory exemption for ``outside sales''
employees.) The regulatory interpretations examine whether any given
employee's chief duty or primary function is to make sales or take
orders while away from the employer's premises, by analyzing the
character of the job as a whole, to distinguish exempt outside sales
employees from other nonexempt occupations (e.g., route delivery
personnel).
Under the current regulations, outside sales employees also may not
exceed a 20 percent tolerance, per work week, performing duties
unrelated to their own outside sales or solicitations. Activities that
are incidental to, and in conjunction with, their own outside sales or
solicitations, including incidental deliveries and collections, are not
counted against the 20 percent nonexempt work limitation. The 20
percent limit is based not upon the employee's own hours of work
performed, but upon the hours worked by other nonexempt employees of
the employer who perform the kind of nonexempt work performed by the
outside sales employee. If no one else performs such nonexempt work,
the base applied is 40 hours, and the amount of nonexempt work allowed
is eight hours per week. There is no salary or fee requirement for the
outside sales employee exemption.
In keeping with similar proposed changes to the other exemptions in
this part, and to simplify the outside sales exemption, the Department
proposes to adopt a primary duty concept similar to the other
exemptions, and to eliminate the particularly confusing 20 percent
restriction on nonexempt work by outside sales employees. By
eliminating this percentage limitation, the Department proposes to
avoid any necessity that the employer track hours of outside sales
employees. This will provide a consistent approach between this
exemption and the exemptions for executive, administrative and
professional employees. The essential elements required for exemption
would continue, i.e., the outside sales employee's primary duty must be
to make sales or obtain orders or contracts for services or the use of
facilities, and the employee must be customarily and regularly engaged
away from the employer's place of business performing such duty.
Outdated illustrations and redundant examples have also been deleted
from the regulations, but no substantive changes are intended by these
deletions. Finally, although the FLSA refers to the ``outside
salesman,'' we propose replacing this gender-specific term and refer
instead to the ``outside sales employee.'' The discussion of nonexempt
work generally in current Sec. 541.506 has been incorporated into
proposed new Sec. 541.701, and the discussion of outside sales
trainees in current Sec. 541.508 has been incorporated into proposed
new Sec. 541.704. As noted above and in connection with similar
proposed changes to the executive, administrative and professional
exemptions, the 20-percent limitation on nonexempt work in current
Sec. 541.507 is proposed to be deleted.
Subpart G, Compensation Requirements, Sec. Sec. 541.600-.606
Salary Levels
Salary level tests have been included as part of the exemption
criteria since the original regulations of 1938. Under the current
rules, most executive, administrative and professional employees must
earn a minimum salary
[[Page 15570]]
level to qualify for the exemption.\14\ Employees paid below the
minimum salary level are not exempt, irrespective of their job duties
and responsibilities. Employees paid a salary above the minimum level
in the regulations may be exempt if they also meet the salary basis and
job duties tests.
---------------------------------------------------------------------------
\14\ There is no salary level test for outside sales employees
and some professional employees (teachers, doctors, lawyers). Such
employees are exempt regardless of their salary.
---------------------------------------------------------------------------
To qualify for exemption under the existing regulations, an
employee currently must earn a minimum salary of $155 per week for the
executive and administrative exemptions, and $170 per week for the
professional exemption. Employees paid above these minimum salary
levels must meet a ``long'' duties test to qualify for the exemption.
The current regulations also provide that employees paid above a higher
(or ``upset'') salary rate of $250 per week are exempt if they meet a
``short'' duties test. As explained above, the short tests contain
fewer requirements and are less burdensome to meet.\15\ The most recent
updates to these minimum salary levels were in 1975. In January 1981,
revisions to increase the salary rates by the outgoing Carter
Administration were stayed indefinitely by the incoming Reagan
Administration. Because the salary levels have not been increased since
1975, the existing salary levels are outdated and no longer useful in
distinguishing between exempt and nonexempt employees.
---------------------------------------------------------------------------
\15\ Also, in 1996, Congress amended the FLSA to exempt certain
hourly-paid computer professionals paid at least $27.63 per hour
($57,470 per year, assuming 40 hours per week).
---------------------------------------------------------------------------
Proposed Standard Test. Under the proposal, the minimum salary
level to qualify for exemption from the FLSA minimum wage and overtime
requirements as an executive, administrative, or professional employee
would be increased from $155 per week to $425 per week. This salary
level would be referred to as the ``standard test,'' thus eliminating
the ``short test'' and ``long test'' terminology. The separate, higher
salary level test for professional employees also would be eliminated.
Most stakeholders agreed that the salary levels need to be
increased. A full-time minimum wage worker earns $206 per week ($5.15/
hour x 40 hours)--an amount above the current long test levels and
closely approaching the current short test level. As a result, under
the current regulations, no full-time salaried worker is automatically
exempt by earning below the long test level, and most salaried
employees are tested for exemption under the short tests. Salary level
was once viewed as being the best indicator of exempt status. Today,
the existing salary level tests are of no help in distinguishing exempt
employees from non-exempt workers. Accordingly, the question is not
whether the Department should raise the salary levels, but by how much.
One suggestion for increasing the current salary levels is to
adjust the existing rates, adopted in 1975, to account for inflation.
The 1999 General Accounting Office report adjusted the 1975 salary
levels for inflation based on 1998 BLS Consumer Price Index (CPI) data,
resulting in the following salary levels: $470/week for the executive
and administrative long test; $515/week for the professional long
tests; and $757/week for the short test.\16\ In January 2001, the
Department published a report that applied 1999 CPI data to inflation
adjust the current salary levels to $480/week for the long test and
$774/week for the short test.\17\
---------------------------------------------------------------------------
\16\ Fair Labor Standards Act: White Collar Exemptions in the
Modern Work Place, GAO/HEHS-99-164, September 30, 1999.
\17\ The ``New Economy'' and Its Impact on Executive,
Administrative and Professional Exemptions to the Fair Labor
Standards Act (FLSA), January 2001, pp. 71-73.
---------------------------------------------------------------------------
However, several considerations weigh against mechanically
adjusting the 1975 salary levels for inflation. First, the Department
is proposing a different, standard duties test. Consequently,
equivalency to either the current long and short test salary levels is
not appropriate. Second, although adjusting the existing rates for
inflation might provide the simplest, mechanical approach, the
Department is concerned about the impact such adjusted salary levels
would have on certain segments of industry and geographic areas of the
country, particularly in the retail industry and in rural areas in the
South, which tend to pay lower salaries. Third, mechanically adjusting
for inflation presumes that the salary levels set in 1975 are precisely
the appropriate baseline; and that the nature of work and the
relationship between job duties and compensation practices have not
changed in the intervening years since 1975. Fourth, the regulatory
history has looked to information on actual salaries and incomes, not
inflation-adjusted amounts. The 1949 Weiss Report, for example,
considered and rejected proposals to increase salary levels based upon
the change in the cost of living from the 1940 levels.\18\
---------------------------------------------------------------------------
\18\ ``Actual data showing the increases in the prevailing
minimum salary levels of bona fide executive, administrative and
professional employees since October 1940 would be the best evidence
of the appropriate salary increases for the revised regulations. * *
* The change in the cost of living which was urged by several
witnesses as a basis for determining the appropriate levels is, in
my opinion, not a measure of the rise in prevailing minimum salary
levels.'' Weiss Report, p. 12.
---------------------------------------------------------------------------
Because of these concerns, the Department believes it would be more
appropriate to examine available data on actual salary levels currently
being paid in the economy. We reviewed a preliminary report on actual
salary levels based on the BLS year 2000 Current Population Survey
(CPS) Outgoing Rotations data set. This data included full-time,
salaried workers aged 16 and above, but excluded the self-employed,
agricultural workers, volunteers and federal employees (who are all not
subject to the salary level tests in the part 541 regulations), broken
out by industry and geographic area.
In considering this data and various salary levels in the
development of this proposal, the Department was guided by the
prescient analysis of a 1958 Department of Labor report recommending
changes to the salary levels:
The salary tests have thus been set for the country as a whole *
* * with appropriate consideration given to the fact that the same
salary cannot operate with equal effect as a test in high-wage and
low-wage industries and regions, and in metropolitan and rural
areas, in an economy as complex and diversified as that of the
United States. Despite the variation in effect, however, it is clear
that the objectives of the salary tests will be accomplished if the
levels selected are set at points near the lower end of the current
range of salaries for each of the categories. Such levels will
assist in demarcating the ``bona fide'' executive, administrative
and professional employees without disqualifying any substantial
number of such employees.
* * * * *
It is my conclusion, from all the evidence, that the lower
portion of the range of prevailing salaries will be most nearly
approximated if the tests are set at about the levels at which no
more than about 10 percent of those in the lowest-range region, or
in the smallest size establishment group, or in the smallest-sized
city group, or in the lowest-wage industry of each of the categories
would fail to meet the tests. Although this may result in loss of
exemption for a few employees who might otherwise qualify for
exemption, * * * in the light of the objectives discussed above,
this is a reasonable exercise of the Administrator's authority to
``delimit'' as well as define.\19\
---------------------------------------------------------------------------
\19\ Report and Recommendations on Proposed Revision of
Regulations, Part 541 under the Fair Labor Standards Act, March 3,
1958, by Harry S. Kantor, Assistant Administrator, Presiding
Officer.
As in the 1958 analysis, the Department looked to ``points near the
[[Page 15571]]
lower end of the current range of salaries'' to determine an
appropriate salary level for the standard test--although we settled
upon on the lowest 20 percent, rather than the lowest 10 percent,
because of the proposed change from the ``short'' and ``long'' test
structure in the proposed rule and because the data included some
salaried employees who would not meet the duties tests for exemption.
Applying this analysis, and also considering adjustments to the current
salary levels for inflation, the Department proposes a standard salary
level test of $425/week. Under this level, approximately the bottom 20
percent of salaried employees would fall below the minimum salary
requirement and be automatically entitled to overtime pay.
Proposed special rule for highly compensated employees. The
proposed regulations also include in Sec. 541.601 a special,
streamlined rule for employees paid $65,000 or more annually. Under
this proposed rule for highly compensated employees, employees paid
$65,000 or more annually and performing non-manual work would be exempt
if they have an identifiable executive, administrative or professional
function as described in the standard duties tests. These highly
compensated employees would not have to meet all the elements of the
standard duties test to qualify for the exemption as a highly
compensated employee. For example, an employee who supervises two
workers but does not participate in any hiring or termination decisions
in the company would still be exempt because the employee has a
function that is identifiable as an executive function. In addition,
the proposed special rule for highly compensated employees would permit
counting base salary, commissions, non-discretionary bonuses and other
non-discretionary compensation in determining whether an employee earns
$65,000 or more annually. To qualify as a highly compensated employee
under the proposed regulation, any commissions or non-discretionary
bonuses would have to be settled and paid out to the employee as due on
at least a monthly basis. An employee who works only a portion of a
year, whether because the employee begins work during the year or
leaves before the end of the year, must be guaranteed a pro rata
portion of the $65,000 annual guarantee. The pro rata portion should be
based upon the number of weeks the employee works in such a position.
If an employee's total annual compensation does not total at least the
guaranteed $65,000 by the end of the year, the proposed regulation
would allow the employer to make a payment by the next pay period
sufficient to bring the employee to the guaranteed level. The employer
is not required to make this payment; however, if the employer elects
not to make the one-time payment, the employee is not exempt as a
highly compensated employee.\20\
---------------------------------------------------------------------------
\20\ Of course, if all of the requirements in either the
executive, administrative or professional employee tests established
in Sec. Sec. 541.100, 541.200 or 541.300 are satisfied, the
employer still would be able to claim the appropriate exemption.
---------------------------------------------------------------------------
To determine an appropriate salary level for highly compensated
employees, the Department looked to points near the higher end of the
current range of salaries and found that the top 20 percent of all
salaried employees earned above $65,000 annually. This level is
consistent with setting the proposed standard test salary level at the
bottom 20 percent of salaried employees.
Puerto Rico, Virgin Islands and American Samoa. Prior to the Fair
Labor Standards Amendments of 1989 (Pub. L. 101-157), Puerto Rico, the
Virgin Islands, and American Samoa were subject to wage order
proceedings under the Act, in lieu of the FLSA minimum wage, and
consequently lower salary test levels traditionally were established
for employees in these jurisdictions. The 1989 Amendments removed
Puerto Rico and the Virgin Islands from the Act's wage order
proceedings, and provided that the U.S. mainland minimum hourly wage
rates under section 6(a)(1) of the Act would apply in Puerto Rico and
the Virgin Islands. For this reason, the proposed regulations would
apply the mainland salary test level of $425 per week in Puerto Rico
and the Virgin Islands. Employees in American Samoa remain subject to
wage order proceedings under the Act. Consequently, the proposed
regulations would apply a special, lower salary test level of $360 per
week for executive, administrative and professional employees in
American Samoa. This special salary level maintains approximately the
same ratio to the mainland test in the current regulations (84% for
executive and administrative workers). Similarly, the proposal would
apply a special test for highly compensated employees in American Samoa
of $55,000 annually. Comments are invited on whether the 84 percent
ratio is appropriate.
Comments on salary levels. The Department invites comments on these
proposed salary levels and on any alternative salary level amounts or
methodologies for determining the appropriate salary level. In
addition, the Department invites comments on the alternative of
removing the salary tests from the regulations entirely and on how the
regulations could be structured without the need for any specific
salary amounts (relying only on duties tests, for example). The
Department also invites comments on the alternative of adopting a
``salary only'' test for highly compensated employees. Under such an
alternative, for example, employees performing non-manual or office
work and earning a total annual compensation over a certain amount
would automatically be considered exempt, without any reference to the
employee's duties.
Salary Basis Test
Under the current regulations, to qualify for the executive,
administrative or professional exemption, an employee must be paid on a
``salary basis'' as defined in Sec. 541.118. The employee must
regularly receive a predetermined amount of salary, on a weekly or less
frequent basis, that ``is not subject to reduction because of
variations in the quality or quantity of the work performed.'' Thus,
with a few exceptions described below, the employee must receive the
full salary for any week in which the employee performs any work
without regard to the number of days or hours worked.
The salary basis test prohibits an employer from making deductions
from the salary ``for absences occasioned by the employer or by the
operating requirements of the business.'' In other words, ``if the
employee is ready, willing, and able to work, deductions may not be
made for time when work is not available.'' However, the employee does
not have to be paid for any work week in which he or she performs no
work.
The current salary basis test also prohibits deductions from pay
for disciplinary problems, performance issues or for absences caused by
jury duty, attendance as a witness, or temporary military leave
(although employers may take offsets for jury or military pay) in any
week in which an employee performs any work.
The current regulations contain several exceptions to these salary
basis rules: An employer may make deductions from the guaranteed pay
``when the employee absents himself from work for a day or more for
personal reasons, other than sickness or accident.'' Deductions also
are permitted for absences of a day or more due to sickness or
disability, if taken in accordance with a bona fide plan, policy or law
(workers compensation, for example) providing wage
[[Page 15572]]
replacement benefits. Employers also may make deductions from an exempt
employee's salary for any hours not worked in the initial and final
weeks of employment or for hours taken as unpaid FMLA leave without
affecting the exempt status of the employee. Finally, less than full
week deductions from pay are permitted for violations of major safety
rules.
Under the current rules, an employer can lose the exemption for an
entire class of employees for making improper deductions from
guaranteed pay, even for highly paid employees. Depending on the facts,
improper deductions can ``indicate that there was no intention to pay
the employee on a salary basis. In such a case, the exemption would not
be applicable to him during the entire period when such deductions were
being made.'' For inadvertent mistakes, however, the regulations
provide employers with a ``window of correction.'' If the facts
demonstrate that the prohibited deduction from guaranteed pay was
inadvertent, the exemption is not lost if the employer reimburses the
employee for such deductions and promises to comply in the future.
In developing options for its proposed rule, the Department
considered whether to eliminate the salary basis test. We carefully
weighed the need for the salary basis test and concluded that the
underlying concept of the test `` guaranteed pay, not subject to
reduction because of variations in the quality or quantity of the work
performed `` should be retained. The nearly universal practice of
paying employees with the requisite status to be bona fide executive,
administrative, or professional employees on a salary basis, as the
1949 hearings on the exemption revealed, reflected the understanding
that such employees have discretion to manage their time and are not
answerable for the number of hours worked or the number of tasks
performed. Such employees are not paid by the hour or task, but for the
general value of services performed. The salary basis test also
describes the quid pro quo enjoyed by exempt employees, which
distinguishes them from non-exempt workers. Exempt employees are not
paid overtime for working over 40 hours in a week. In exchange, the
employer must provide a guaranteed salary that cannot be reduced when
an employee works less than 40 hours.
The Department also considered amending the salary basis test to
permit deductions from pay for cases in which an exempt employee
chooses to be absent for a part of a day. But allowing such ``pay
docking'' for partial-day absences would breach the quid pro quo and
blur the line between exempt and non-exempt employees. An exempt
manager, for example, does not receive extra pay for working 16 hours
on a Thursday to complete a project; thus, as a matter of fundamental
fairness, an employer should not be allowed to dock the employee's
salary for leaving work early on Friday. Of course, an employer can
terminate an employee who abuses this salary arrangement.
Although the proposed rule retains the salary basis test and its
concept of guaranteed pay in proposed Sec. 541.602, two significant
updates are included in the proposal: Disciplinary Deductions. The
proposed regulations would allow an exception to the no pay-docking
rule for deductions from pay for full-day disciplinary suspensions. For
example, an employer would be permitted to suspend an exempt employee
without pay for reasons such as sexual harassment or workplace
violence. The current regulations permit such deductions only for
penalties imposed for infractions of safety rules of major significance
and for unpaid suspensions for one or more full work weeks (i.e.,
Monday to Friday). The proposed change would allow employers to suspend
exempt employees without pay for discriminatory harassment for two
days, four days or 10 days, as appropriate to respond to the
misconduct. The Department believes this is a common-sense change that
will permit employers to uniformly hold exempt employees to the same
standards of conduct as that required of nonexempt, hourly workers.
Safe Harbor Provision. Under the current regulations, an employer who
makes improper deductions from pay can lose the exemption for an entire
class of employees. However, as mentioned above, the current rules also
include a ``window of correction'' provision at 541.118(a)(6) under
which an employer who inadvertently makes impermissible deductions can,
in some circumstances, retain the exemption by reimbursing employees
for any improper deductions. Unfortunately, the ``window of
correction'' has proved difficult for the Department to administer and
has been the source of considerable litigation. The proposed rule, at
541.603, would clarify the circumstances and the extent to which an
improper deduction causes an employee or groups of employees to become
nonexempt. The proposed rule maintains the underlying purpose of the
current rule that an employer does not lose the FLSA exemption because
of isolated incidents of improper pay deductions. Under the proposal,
the exemption would be lost only if there is a pattern and practice of
improper deductions, and then only for employees in the same job
classification and working for the same manager who is responsible for
the improper pay docking decision or policy. For example, if one
manager at a single company facility routinely docks the pay of
engineers for partial-day absences, then all engineers at that one
facility whose pay could have been docked by that same manager are not
exempt. Engineers at other facilities or working for other managers
would remain exempt. Further, the proposed rule would create a new
``safe harbor'' provision: if an employer has a written policy
prohibiting improper pay deductions, notifies employees of that policy
and reimburses employees for any improper deductions, then that
employer would not lose the exemption for any employees unless the
employer's policy prohibiting improper deductions is repeatedly and
willfully violated. The Department believes this approach would be much
easier to apply uniformly and more consistent with the purposes of the
FLSA.
Proposed section 541.604 continues the guidance from current
541.118(b) on allowing payments of additional compensation besides the
salary as not being inconsistent with the salary basis of payment, and
on pay plans that compute an exempt employee's salary from daily or
shift rates if accompanied by the minimum guarantee. The language has
been clarified to add hourly compensation plans that include such
guarantees, consistent with established enforcement practices, if a
reasonable relationship exists between the guaranteed amount and an
employee's usual earnings for a normal scheduled work week.
Proposed Sec. 541.605 contains updated guidance on the ``fee
basis'' of payment permitted for administrative and professional
employees, taken from current sections 541.213 and 541.313. Proposed
Sec. 541.606 provides guidance on payment of required salary amounts
``exclusive of board, lodging or other facilities'' or ``free and
clear,'' taken from Sec. Sec. 541.117(c), 541.211(d), and 541.311(d)
of the current regulations and expanded to cross-reference 29 CFR
531.32 for more guidance on qualifying ``other facilities'' similar to
board and lodging.
The former ``upset salary'' provisions that were part of the short
tests for executive, administrative and professional employees have
been deleted from this proposed rule (current Sec. Sec. 541.119,
541.214, and 541.315).
[[Page 15573]]
Subpart H, Definitions and Miscellaneous Provisions, Sec. Sec.
541.700-.708
To eliminate unnecessary repetition, the proposed regulations would
move definitions and other provisions applicable to several or all of
the exemption categories to a new subpart H, Definitions and
Miscellaneous Provisions. The proposed subpart H would define ``primary
duty'' in proposed Sec. 541.700; ``directly and closely related'' in
proposed Section 541.702; ``exempt and nonexempt work'' in proposed
Sec. 541.701; and ``office or non-manual work'' in proposed Sec.
541.703. Subpart H would also contain provisions regarding trainees,
emergencies and occasional tasks, combination exemptions, the motion
picture producing industry, and employees of public agencies. Most of
these provisions have been moved from the existing regulations without
substantial change, although some changes have been made to simplify
and update the current regulations. Current Sec. 541.602, containing
guidance on the percentage limitations on performing nonexempt work for
executive and administrative employees in multi-store retailing
operations, is proposed to be deleted for the same reasons noted above
for eliminating those former long duties test requirements from the
executive and administrative exemptions.
IV. Executive Order 12866 and the Small Business Regulatory Enforcement
Fairness Act
This proposed rule has been drafted and reviewed in accordance with
Executive Order 12866, section 1(b), Principles of Regulation. The
Department has determined that the proposed rule is an economically
significant regulatory action under section 3(f)(1) of Executive Order
12866. Based on a preliminary analysis of the data the rule could have
an annual effect on the economy of $100 million or more. However, the
proposed rule is not likely to adversely affect in a material way the
economy, a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or state, local, or tribal
governments or communities; create a serious inconsistency or otherwise
interfere with an action taken or planned by another agency; or
materially alter the budgetary impact of entitlements, grants, user
fees, or loan programs or the rights and obligations of recipients
thereof.
For similar reasons, the Department has concluded that this
proposed rule also is a major rule under the Small Business Regulatory
Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.). Although it
could result in an annual effect on the economy of $100 million or
more, it is not likely to result in a major increase in costs or prices
for consumers, individual industries, Federal, State or local
government agencies, or geographic regions; or have significant adverse
effects on competition, employment, investment, productivity,
innovation, or on the ability of United States-based enterprises to
compete with foreign-based enterprises in domestic or export markets.
As a result, the Department has prepared a Preliminary Regulatory
Impact Analysis (PRIA) in connection with this proposed rule as
required under section 6(a)(3) of the Order and the Office of
Management and Budget has reviewed the rule. Copies of the complete
PRIA may be obtained from the Department by contacting the Wage and
Hour Division at the address and telephone number provided above. The
results of the PRIA are summarized below.
Preliminary Regulatory Impact Analysis
Overview
The proposed changes in the rules for determining whether an
employee is exempt as an executive, administrative, or professional
(EAP) worker under the Fair Labor Standards Act (FLSA) will affect
virtually all employers covered by the FLSA that employ workers within
the scope of the exemptions in 29 CFR part 541. Employers will be
affected unless all of their employees are expressly excluded from FLSA
coverage by the statute. Excluded from these regulations are the self-
employed, agricultural workers, railroad workers, selected occupations
in the transportation industries and in automobile dealerships, and
most Federal employees subject to separate rules administered by the
U.S. Office of Personnel Management. However, 29 CFR part 541
regulations apply to the following Federal agencies: Library of
Congress, U.S. Postal Service, Postal Rate Commission, and Tennessee
Valley Authority (see 29 U.S.C. 204(f)).
Therefore, employers in all industrial sectors except agriculture,
railroads, and private households are subject to the existing and
proposed regulations. The regulations also apply to State and local
governmental employees.
The PRIA indicates that there are 6.5 million establishments with
109.5 million employees, annual payrolls totaling $2.8 trillion, annual
sales revenues of $17.9 trillion, and annual pre-tax profits of $769.5
billion in the industry sectors affected by the proposed rule.
Corresponding data based on SBA's size standards for small business
entities indicates that over 5.2 million of these establishments are
considered to be small businesses. These small firms employ
approximately 38.7 million workers with an annual payroll of $940.0
billion. Their total annual sales are estimated to be $5.7 trillion and
their annual pre-tax profits are estimated to be $233.9 billion.
Approximately 79.8 percent of the affected establishments are
considered to be small businesses and they account for 38.8 percent of
the employment, 33.7 percent of the payroll, 31.8 percent of the annual
sales, and 30.4 percent of the annual pre-tax profits.
Over 87,400 state and local governmental entities will be affected
by the proposed rule (3,043 county governments, 19,372 municipal
governments, 16,629 township governments, 34,683 special district
governments, and 13,726 school district governments). Nationwide, these
entities receive more than $1.4 trillion in general revenues, including
revenues from taxes, some categories of fees and charges, and
intergovernmental transfers. Their direct expenditures exceed $1.6
trillion in the aggregate. State and local governments employ more than
4 million workers and their payrolls exceed $12.6 billion per month.
The following tables summarize the provisions of the current 29 CFR
part 541 and the proposed rule that were analyzed in the PRIA.
Table 1.--Weekly Salary Levels in the Current and Proposed Rules
------------------------------------------------------------------------
Dollars
------------------------------------------------------------------------
Current Rule
Long Test:
Executives................................................. 155
Administrative............................................. 155
Professionals.............................................. 170
Short Test................................................... 250
Proposed Rule
Standard Test................................................ 425
Highly Compensated........................................... 1,250
------------------------------------------------------------------------
[[Page 15574]]
Table 2.--The Current and Proposed Duties Tests for Executive Employees
------------------------------------------------------------------------
Proposed standard
Current long test (salary Current short test test (salary and
and duties) (salary and duties) duties)
------------------------------------------------------------------------
$155 per week............... $250 per week....... $425 per week.
Primary duty of the Primary duty of the Primary duty of
management of the management of the management of the
enterprise or a recognized enterprise or a enterprise or a
department or subdivision. recognized recognized
department or department or
subdivision. subdivision.
Customarily and regularly Customarily and Customarily and
directs the work of two or regularly directs regularly directs
more other employees. the work of two or the work of two or
more other more other
employees. employees.
Has authority to hire or Has authority to
fire other employees (or hire or fire other
recommendations as to employees (or
hiring, firing, promotion recommendations as
or other change of status to hiring, firing,
of employees is given promotion or other
particlar weight). change of status of
other employees is
given particlar
weight).
Customarily and regularly
exercises discretionary
powers.
Does not devote more than 20
percent (40 percent in
retail or service
establishments) of time to
activities that are not
directly and closely
related to exempt work.
------------------------------------------------------------------------
Table 3.--The Current and Proposed Duties Tests for Administrative
Employees
------------------------------------------------------------------------
Proposed standard
Current long test (salary Current short test test (salary and
and duties) (salary and duties) duties)
------------------------------------------------------------------------
$155 per week............... $250 per week....... $425 per week.
Primary duty of performing Primary duty of Primary duty of
office or non-manual work performing office performing office
directly related to or non-manual work or non-manual work
management policies or directly related to directly related to
general business operations management policies the management or
of the employer or the or general business general business
employer's customers. operations of the operations of the
employer or the employer or the
employer's employer's
customers. customers.
Customarily and regularly Customarily and Holds a ``position
exercises discretion and regularly exercises of responsibility''
independent judgment. discretion and with the employer,
independent defined as either
judgment. (1) performing work
of substantial
importance or (2)
performing work
requiring a high
level skill or
training.
Regularly and directly
assists a proprietor, or
exempt executive or
administrative employee; or
performs specialized or
technical work requiring
special knowledge under
only general supervision;
or executes special
assignments under only
general supervision.
Does not devote more than 20
percent (40 percent in
retail or service
establishments) of time to
activities that are not
directly and closely
related to exempt work.
------------------------------------------------------------------------
Table 4.--The Current and Proposed Duties Tests for Learned Professional
Employees
------------------------------------------------------------------------
Proposed standard
Current long test (salary Current short test test (salary and
and duties) (salary and duties) duties)
------------------------------------------------------------------------
$170 per week............... $250 per week....... $425 per week.
Primary duty of performing Primary duty of Primary duty of
work requiring knowledge of performing work performing office
an advanced type in a field requiring knowledge or non-manual work
of science or learning of an advanced type requiring knowledge
customarily acquired by a in a field of of an advanced type
prolonged course of science or learning in a field of
specialized intellectual customarily science or learning
instruction and study. acquired by a customarily
Consistently exercises prolonged course of acquired by a
discretion and judgment.. specialized prolonged course of
Performs work that is intellectual specialized
predominantly intellectual instruction and intellectual
and varied in character and study instruction, but
is of such character that Consistently which also may be
the output produced or exercises acquired by
result accomplished cannot discretion and alternative means
be standardized in relation judgment. such as an
to a given period of time.. equivalent
Does not devote more than 20 combination of
percent of time to intellectual
activities that are not an instruction and
essential part of and work experience.
necessarily incident to
exempt work.
------------------------------------------------------------------------
Table 5.--The Current and Proposed Duties Tests for Creative
Professional Employees
------------------------------------------------------------------------
Proposed standard
Current long test (salary Current short test test (salary and
and duties) (salary and duties) duties)
------------------------------------------------------------------------
$170 per week............... $250 per week....... $425 per week.
[[Page 15575]]
Primary duty of performing Performs work Primary duty of
work that is original and requiring performing work
creative in character in a invention, requiring
recognized field of imagination, or invention,
artistic endeavor, and the talent in a imagination,
result of which depends recognized field of originality or
primarily on the invention, artistic endeavor. talent in a
imagination, or talent of recognized field of
the employee. artistic or
Consistently exercises creative endeavor.
discretion and judgment..
Performs work that is
predominantly intellectual
and varied in character and
is of such character that
the output produced or
result accomplished cannot
be standardized in relation
to a given period of time.
Does not devote more than 20
percent of time to
activities that are not
directly and closely
related to exempt work.
------------------------------------------------------------------------
Table 6.--The Current and Proposed Duties Tests for Computer Employees
----------------------------------------------------------------------------------------------------------------
Current long test (salary and Current short test Section 13(a)(17) test Proposed Standard Test
duties) (salary and duties) (salary and duties) (salary and duties)
----------------------------------------------------------------------------------------------------------------
$170 per week........................ $250 per week.......... $27.63 an hour......... $425 per week or $27.63
an hour.
Primary duty of performing work Primary duty of Primary duty of (A) Primary duty of (A)
requiring theoretical and practical performing work application of systems application of systems
application of highly-specialized requiring theoretical analysis techniques analysis techniques
knowledge in computer systems and practical and procedures, and procedures,
analysis, programming, and software application of highly- including consulting including consulting
engineering. specialized knowledge with users, to with users, to
in computer systems determine hardware, determine hardware,
analysis, programming, software of system software of system
and software functional functional
engineering. applications; or (B) applications; or (B)
design, development, design, development,
documentation documentation
analysis, creation, analysis, creation,
testing, or testing, or
modification of modification of
computer systems or computer systems or
programs, including programs, including
prototypes, based on prototypes, based on
and related to user of and related to user of
system design system design
specifications; or (C) specifications; or (C)
design, documentation, design, documentation,
testing , creation or testing , creation or
modification of modification of
computer programs computer programs
related to machine related to machine
operating systems; or operating systems; or
(D) a combination of (D) a combination of
duties described in duties described in
(A), (B) and (C), the (A), (B) and (C), the
performance of which performance of which
requires the same requires the same
level of skills. level of skills.
Employed as a computer systems Employed as a computer Employed as a computer Employed as a computer
analyst, computer programmer, systems analyst, systems analyst, systems analyst,
software engineer, or other computer programmer, computer programmer, computer programmer,
similarly skilled worker in the software engineer, or software engineer, or software engineer, or
computer software field. other similarly other similarly other similarly
skilled worker in the skilled worker in the skilled worker in the
computer software computer software computer software
field. field. field.
Consistently exercises discretion and Consistently exercises .......................
judgment. discretion and
judgment.
Performs work that is predominantly
intellectual and varied in character
and is of such character that he
output produced or result
accomplished cannot be standardized
in relation to a given period of
time.
Does not devote more than 20 percent
of time to activities that are not
directly and closely related to
exempt work.
----------------------------------------------------------------------------------------------------------------
Table 7.--The Current and Proposed Duties Tests for Outside Sales
Employees
------------------------------------------------------------------------
Proposed standard
Current long test (salary Current short test test (salary and
and duties) (salary and duties) duties)
------------------------------------------------------------------------
None required............... None required....... None required.
[[Page 15576]]
Employed for the purpose of No separate Primary duty of
and customarily and ``short'' test. making sales; or of
regularly engaged away from obtaining orders or
the employer's place of contracts for
business in making sales; services or for the
or in obtaining orders or use of facilities
contracts for services or for which a
for the use of facilities consideration will
for which a consideration be paid by the
will be paid by the client client or customer
or customer. Customarily and
regularly engaged
away from the
employer's place or
places of business.
Does not devote more than 20
percent of the hours worked
by nonexempt employees of
the employer to activities
that are not incidental to
and in conjunction with the
employee's own outside
sales or solicitations.
------------------------------------------------------------------------
Methodology for Estimating Costs
The principal database used in the PRIA is the 2001 Current
Population Survey (CPS). A complete description of the methodology used
for determining the employees who are potentially exempt and nonexempt
from the overtime requirements of the current and proposed rule is
contained in the PRIA available by contacting the Wage and Hour
Division at the address and telephone number provided above.
The economic impact of the proposed rule includes two components:
One-time implementation costs; and recurring incremental payroll costs
incurred by employers for those employees presently treated as exempt
from overtime under the current rule, who become nonexempt.
The implementation costs contain two parts. The first part includes
the amount of time employers would take to: (1) Read and understand the
proposed rule; (2) update and formulate their overtime policies; (3)
notify employees of any changes; and (4) all other time taken to
implement the proposed rule. The second part of the implementation
costs is the amount of time employers would take to review their job
categories to determine (1) whether or not a particular job category is
exempt or nonexempt under the proposed rule, and (2) how to adjust to
the new salary levels and duties tests. To estimate the implementation
costs of the proposed rule, the department contacted six human resource
specialists from around the country to obtain information on the amount
of time small and large businesses would take for each of these
activities. High and low estimates of the implementation costs were
estimated by varying the amount of time taken to review job categories
and other time taken to implement the proposed rule.
The second component of the economic impact of the proposed rule is
the recurring incremental payroll costs incurred by employers for those
employees presently treated as exempt from overtime under the current
rule, who become nonexempt as a result of raising the salary levels and
revising the duties tests.
Affected employers would have four choices concerning potential
payroll costs: (1) Adhering to a 40 hour work week; (2) paying
statutory overtime premiums for affected workers' hours worked beyond
40 per week; (3) raising employees' salaries to levels required for
exempt status by the proposed rule; or (4) converting salaried
employees' basis of pay to an hourly rate (no less than the federal
minimum wage) that results in virtually no (or only a minimal) changes
to the total compensation paid to those workers. Employers could also
change the duties of currently exempt and nonexempt workers to comply
with the proposed rule.
For the second choice above, paying overtime premium pay, employers
typically have two options, with differing cost implications, for
meeting their statutory overtime obligations. For example, assume an
employer paid an employee a fixed salary of $400 per week with no
overtime premium pay, for which the employee worked 45 hours per week,
and the employer must now begin to pay this employee overtime pay. As
one option, the employer could assume that the former weekly salary of
$400 represents compensation for a standard 40-hour workweek, and pay
this employee in the future time-and-one-half the $10 hourly rate for
any overtime hours worked beyond 40 per week. For a 45-hour workweek,
total compensation due, including overtime, would equal $475 ((40 hours
x $10/hour) + (5 hours x $15/hour) = $475), compared to $400 formerly.
As a second option, the employer could pay the fixed salary of $400 per
week as total straight time pay for all hours worked in the week
(provided it equals or exceeds the federal minimum wage), and pay
additional ``half-time'' for each hour worked beyond 40 in the week.
This method of payment is known as a ``fixed salary for fluctuating
hours'' (see 29 CFR 778.114). For a 45-hour workweek, total
compensation due under this method, including overtime, would equal
$422.22 ($400 + (($400/45) x \1/2\ x 5) = $422.22).
The third choice above is straightforward--an employer could simply
raise the salary level for currently exempt salaried workers earning
less than $22,100 to at least the new proposed salary level or more and
have them remain exempt salaried workers.
Nothing in the FLSA would prohibit an employer affected by the
proposed rule, or under the current rule, from implementing the fourth
choice above that results in virtually no (or only a minimal) increase
in labor costs. For example, to pay an hourly rate and time and one-
half that rate for 5 hours of overtime in a 45-hour workweek and incur
approximately the same total costs as the former $400 weekly salary,
the regular hourly rate would compute to $8.421 ((40 hours x $8.421) +
(5 hours x (1.5 x $8.421)) = $399.99).
Most employers affected by the proposed rule would be expected to
choose the most cost-effective compensation adjustment method that
maintains the stability of their work force, pay structure, and output
levels. Given the range of options available to an employer confronted
with paying overtime to employees previously treated as exempt, the
actual payroll cost impact for individual employers could range from
near zero to up to the maximum cost impacts estimated in the
Department's PRIA. However, for the PRIA it is was assumed that, for
any nonexempt employee who satisfies the pertinent duties test, the
employer will choose to pay the smaller of either the additional weekly
salary required to qualify the employee for exemption or the usual
weekly overtime payment for the employee. Thus, the Department's
[[Page 15577]]
assessment of costs of the proposed rule reflects a range of upper
bound estimates. Actual payroll costs would be expected to be lower
than the estimates summarized below and presented in the PRIA because
of the payroll adjustment option employers have that could offset the
impact of the proposed rule. Moreover, some of the cost is likely to be
passed on to consumers in the form of higher prices, some of the cost
is likely to be passed on to business owners and shareholders in the
form of lower profits, and some of the cost is likely to be passed on
to workers in the form of fewer overtime hours.
Finally, estimated costs are presented as ranges because data
limitations prevent the Department from identifying exactly which
workers are exempt and nonexempt based on the current and proposed
duties tests. The estimates were determined using previous Department
and U.S. General Accounting Office methodology and the latest data from
the Bureau of Labor Statistics, the Census Bureau, and Dunn and
Bradstreet. The ranges result from estimating a minimum and maximum
number of workers that are likely to change from exempt to nonexempt
employees. To estimate the recurring payroll costs of the proposed
rule, it was necessary to apply some assumptions to the PRIA data to
identify which employees are exempt and nonexempt under the current and
proposed rules. Specifically, the Department assumed that for employees
in occupations with a combination of exempt and nonexempt duties those
with lower salaries would more likely be non-exempt. The Department
also assumed that six years or more of work experience would be
considered equivalent to a bachelor's degree for the learned
professional exemption. For each occupational category with a
combination of exempt and nonexempt duties a lower bound and an upper
bound estimate of the number of employees who are exempt has been
calculated. Finally, it was assumed that for each executive,
administrative, or professional employee who becomes nonexempt, the
likely incremental payroll cost is the smaller of the additional weekly
salary required to qualify for exemption or the usual weekly overtime
payment required to be paid to that worker.
Methodology for Estimating Benefits
The benefit estimates are lower bound estimates based on PRIA data
and a Minimum Wage Study Commission report that estimated overtime
violation rates by industry. The Department applied these rates to the
overtime hours worked by salaried employees in the PRIA data, and then
reduced these estimates by two-thirds to account for other types of
overtime violations (off-the-clock-work, straight time for all hours)
that occur in addition to violations of the ``white collar''
exemptions. The Department's high and low benefit estimates result from
different assumptions on the lower costs associated with determining
the exempt status of employees including conducting expensive time-and-
motion studies and lower litigation costs, as well as the updated
window of correction and safe harbor provisions in the proposed rule.
The benefit estimates summarized below are lower bound estimates
because they exclude significant, but difficult to quantify, benefits
such as avoidance of the following additional costs which could be
incurred by an employer who has misclassified employees as exempt: (1)
The second and third years of overtime back pay allowed under the FLSA;
(2) an amount equal to the back pay as liquidated damages; and (3)
litigation costs, including attorney's fees. The benefit estimates also
exclude the reduced human resource and legal costs for classifying
workers under the proposed rule, and improved management productivity
from reduced Department of Labor investigations and private litigation.
Three assumptions were applied to the PRIA data to estimate the
benefits of the proposed rule; the Department requests comments on
these and all assumptions used for the impact analysis. First, the
overtime violation rates published by the Minimum Wage Study Commission
in 1980 were assumed to apply today. Second, the Commission's overtime
violation rates were reduced to account for other types of overtime
violations (off-the-clock-work, straight time for all hours) that occur
in addition to violations of the ``white collar'' exemptions. Finally,
the Department's range of benefit estimates result from different
assumptions on the impact of the updated window-of-correction and safe
harbor provisions in the proposed rule. The Department welcomes
comments and estimates from the public on the amount of benefits
associated with these provisions and other significant, but difficult
to quantify, benefits such as the reduced human resource and legal
costs for classifying workers under the proposed rule, and improved
management productivity from reduced investigations and litigation.
Total Costs and Benefits
The upper bound total cost estimate for the proposed rule ranges
from $870.3 million to $1,575.5 million. This includes one-time
implementation costs ranging from $535.4 million to $680.0 million and
recurring payroll costs ranging from $334.8 million to $895.5 million.
The lower bound total benefit estimate for the proposed rule ranges
from $1,109.8 million to $1,972.7 million.
Private Sector Costs and Benefits
The upper bound private sector cost estimate for the proposed rule
ranges from $849.2 million to $1,531.9 million. This includes one-time
implementation costs ranging from $521.4 million to $660.3 million and
recurring payroll costs ranging from $327.8 million to $871.6 million.
The total private sector costs as a percentage of total payroll range
from 0.03 percent to 0.05 percent for all industries, and from 0.11
percent to 0.21 percent of total pre-tax profits for all industries.
The lower bound private sector benefit estimate for the proposed
rule ranges from $1,061.3 million to $1,886.5 million. These estimates
include the impact of updating the window of correction and safe harbor
provisions in the proposed rule but do not include significant, but
difficult to quantify, benefits such as the reduced human resource and
legal costs for classifying workers under the proposed rule, and
improved management productivity from reduced investigations and
litigation.
The largest total costs are incurred by the Health Services
industry ($85.3 million to $163.4 million), Construction ($71.2 million
to $119.1 million), Business Services ($54.1 million to $86.4 million),
Personal Services ($38.1 million to $83.8 million), and Real Estate
($32.2 million to $71.4 million). The 10 industries with the highest
costs account for over 50.4 percent of the total private sector costs.
Although the benefits of the proposed rule exceed the costs at the
total level and for many of the major industry levels, there are some
industries where the costs exceed the benefits (see Table 8). This
result arises for three reasons. First, the costs are upper bound
estimates and the benefits are lower bound estimates (see Methodology
section above). The true net benefit for most industries could very
well be positive. Second, a large increase in the salary levels raises
the potential costs of the proposed rule. Finally, the industries most
likely to bear the cost of the proposed rule are not necessarily the
[[Page 15578]]
industries most likely to receive the benefits. Most of the benefits
come from the reduction in the potential legal liability from
unintentionally misclassifying fairly high paid salaried workers
working more than 40 hours per week in occupations with exempt and
nonexempt duties, while most of the costs come from increasing the
salary level tests for relatively low paid salaried workers. The PRIA
data suggest that the number of workers in these two groups is often
not equal at a detailed industry level. For example, because of the
historical pattern of compensation levels in the Personal Services and
Automotive Repair, Services, and Parking industries one would expect to
find far more relatively low paid salaried workers affected by the
proposed salary level tests than relatively high paid salaried workers
unintentionally misclassified.
The largest total costs as a percentage of payroll are incurred by
the Educational Services industry (0.37 percent to 0.98 percent),
Agricultural Services (0.22 percent to 0.53 percent), Personal Services
(0.21 percent to 0.46 percent), Automotive Repair, Services, and
Parking (0.13 percent to 0.29 percent), and Transportation by Air (0.11
percent to 0.22 percent).
The largest recurring payroll costs as a percentage of pre-tax
profits are incurred by the Educational Services industry (1.95 percent
to 5.22 percent), Personal Services (1.38 percent to 3.03 percent),
Automotive Repair, Services, and Parking (0.84 percent to 1.81
percent), Agricultural Services (0.54 percent to 1.26 percent), and
Transportation by Air (0.54 percent to 1.07 percent).
Table 8.--Summary of Costs and Benefits for Industry Sectors Affected by the Proposed Rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Low High Low High
SIC Industry implementation implementation payroll payroll Low total High total Low High Low High
description costs costs costs costs costs costs benefits benefits difference difference
--------------------------------------------------------------------------------------------------------------------------------------------------------
07........ Agricultural $2,895 $4,020 $14,833 $37,529 $17,729 $41,549 $2,032 $3,612 -$15,697 -$37,937
Services 4.
08........ Forestry 4..... 83 113 27 58 110 171 346 614 235 444
09........ Fishing, 63 88 121 381 184 469 195 346 11 -123
Hunting, &
Trapping 4.
-----------------
Agriculture 3,042 4,221 14,981 37,968 18,023 42,188 2,572 4,573 -15,451 -37,616
Subtotal.
10........ Metal mining... 121 146 0 0 121 146 185 328 64 182
12........ Coal mining.... 239 293 119 346 358 639 647 1,150 289 511
13........ Oil & gas 1,431 1,820 856 1,882 2,287 3,701 4,525 8,044 2,238 4,342
extraction.
14........ Nonmetallic 475 602 8 13 483 615 520 924 37 309
minerals,
except fuels.
-----------------
Mining 2,266 2,860 984 2,242 3,250 5,102 5,877 10,447 2,627 5,345
Subtotal.
15-17..... Construction... 48,090 64,024 23,096 55,046 71,186 119,070 33,486 59,524 -37,700 -59,545
20........ Food & kindred 5,587 6,577 1,767 3,793 7,354 10,370 3,654 6,495 -3,700 -3,875
products.
21........ Tobacco 87 100 83 197 169 297 110 195 -60 -102
products.
22........ Textile mill 1,855 2,176 488 1,192 2,343 3,368 538 956 -1,806 -2,412
products.
23........ Apparel & other 4,367 5,212 960 1,896 5,327 7,108 790 1,405 -4,537 -5,703
textile
products.
24........ Lumber & wood 5,746 6,917 804 2,103 6,550 9,021 922 1,639 -5,628 -7,382
products.
25........ Furniture & 2,454 2,918 371 1,068 2,824 3,986 727 1,292 -2,098 -2,694
fixtures.
26........ Paper & allied 2,034 2,383 826 1,754 2,860 4,137 1,484 2,638 -1,376 -1,500
products.
27........ Printing & 10,260 12,319 3,607 16,921 13,867 29,240 3,554 6,318 -10,313 -22,922
publishing.
28........ Chemicals & 3,118 3,678 2,969 11,299 6,087 14,977 5,892 10,473 -196 -4,504
allied
products.
29........ Petroleum & 481 569 910 1,637 1,390 2,206 776 1,380 -614 -826
coal products.
30........ Rubber & 4,040 4,775 819 2,313 4,860 7,088 1,586 2,820 -3,274 -4,268
miscellaneous
plastics
products.
31........ Leather & 373 443 179 459 552 902 261 465 -291 -437
leather
products.
32........ Stone, clay, & 2,915 3,487 642 1,616 3,558 5,104 998 1,774 -2,560 -3,329
glass products.
33........ Primary metal 2,125 2,485 1,078 3,017 3,203 5,501 1,596 2,837 -1,607 -2,664
industries.
34........ Fabricated 7,498 8,927 1,993 4,837 9,491 13,764 1,942 3,452 -7,549 -10,311
metal products.
35........ Industrial 10,509 12,543 2,778 6,887 13,287 19,430 7,515 13,359 -5,772 -6,071
machinery &
equipment.
36........ Electronic & 5,180 6,076 3,768 8,860 8,948 14,936 6,759 12,014 -2,189 -2,922
other electric
equipment.
37........ Transportation 4,689 5,469 5,207 11,883 9,896 17,352 5,352 9,513 -4,545 -7,839
equipment.
38........ Instruments & 3,032 3,573 1,911 4,940 4,943 8,512 3,057 5,435 -1,885 -3,078
related
products.
39........ Misc. 2,886 3,470 1,281 3,727 4,167 7,196 1,220 2,169 -2,947 -5,027
manufacturing
industries.
-----------------
Manufacturin 79,235 94,095 32,442 90,399 111,678 184,494 48,733 86,628 -62,944 -97,866
g Subtotal.
40 Railroad nc nc 528 1,890 528 1,890 1,510 2,684 982 793
Transportation
(5).
41........ Local & 1,500 1,881 1,216 2,652 2,716 4,533 861 1,531 -1,854 -3,003
interurban
passenger
transportation.
42........ Motor freight 8,873 11,271 3,415 7,879 12,288 19,150 7,722 13,727 -4,566 -5,423
transportation
& warehousing.
43........ U.S. Postal 2,875 3,610 1,359 5,147 4,234 8,757 643 1,143 -3,591 -7,614
Service (6).
44........ Water 655 827 380 1,255 1,036 2,082 1,694 3,010 658 928
transportation.
45........ Transportation 986 1,225 11,213 22,633 12,200 23,858 4,588 8,155 -7,612 -15,703
by air (7).
46........ Pipelines, 59 74 6 14 65 89 31 54 -35 -34
except natural
gas.
47........ Transportation 3,125 4,014 822 2,407 3,947 6,421 963 1,712 -2,984 -4,710
services.
48........ Communications. 3,815 4,740 5,424 13,690 9,239 18,430 14,516 25,804 5,277 7,374
49........ Electric, gas, 2,052 2,537 2,623 7,136 4,675 9,673 5,977 10,625 1,302 952
& sanitary
services.
-----------------
Trans., 23,940 30,180 26,460 62,813 50,400 92,993 36,994 65,761 -13,406 -27,233
Comm., &
Pub. Util.
Subtotal.
50........ Wholesale 25,544 32,579 4,334 10,296 29,877 42,875 38,356 68,182 8,479 25,307
trade--durable
goods.
51........ Wholesale 14,764 18,738 4,538 10,934 19,302 29,672 31,512 56,016 12,210 26,344
trade--nondura
ble goods.
-----------------
Wholesale 40,308 51,318 8,871 21,229 49,179 72,547 69,868 124,198 20,689 51,650
Subtotal.
52........ Building 4,608 5,874 949 2,380 5,557 8,254 10,553 18,758 4,995 10,504
materials,
hardware,
garden supply,
& mobile home
dealers.
[[Page 15579]]
53........ General 5,222 6,352 2,961 7,041 8,183 13,393 14,966 26,604 6,783 13,210
merchandise
stores.
54........ Food stores.... 13,060 16,499 6,487 16,941 19,547 33,441 19,519 34,698 -28 1,257
55........ Automotive 13,380 17,101 3,942 10,470 17,322 27,571 38,529 68,490 21,207 40,919
dealers &
gasoline
service
stations.
56........ Apparel & 7,926 10,182 959 1,905 8,885 12,087 5,547 9,860 -3,339 -2,227
accessory
stores.
57........ Home furniture, 7,015 9,032 1,627 3,795 8,641 12,827 20,518 36,472 11,876 23,646
furnishings, &
equipment
stores.
58........ Eating & 33,346 42,414 9,310 26,857 42,656 69,271 38,054 67,646 -4,601 -1,626
drinking
places.
59........ Miscellaneous 22,326 28,755 6,152 14,028 28,478 42,783 31,195 55,452 2,717 12,669
retail.
-----------------
Retail 106,884 136,210 32,387 83,417 139,271 219,627 178,881 317,979 39,611 98,353
Subtotal.
60........ Depository 6,943 8,924 2,677 8,836 9,620 17,760 23,042 40,960 13,422 23,200
institutions.
61........ Nondepository 2,727 3,580 1,795 4,701 4,522 8,281 13,449 23,907 8,927 15,625
credit
institutions.
62-67..... Holding & other 4,055 5,302 8,260 20,789 12,315 26,091 30,936 54,992 18,620 28,901
investment
offices,
except trusts,
& Security &
commodity
brokers,
dealers,
exchanges, &
services.
63-64..... Insurance 9,454 12,342 6,016 11,003 15,470 23,345 26,681 47,428 11,211 24,083
carriers,
Insurance
agents,
brokers, &
services.
65........ Real estate.... 10,801 14,565 21,401 56,982 32,202 71,546 21,773 38,703 -10,429 -32,843
-----------------
Fin., Insure., 33,980 44,713 40,150 102,311 74,130 147,024 115,881 205,990 41,751 58,966
& Real Est.
Subtotal.
70........ Hotels, rooming 6,394 7,899 2,707 7,492 9,101 15,391 10,461 18,595 1,359 3,204
houses, camps,
& other
lodging places.
72........ Personal 12,705 16,505 25,351 67,270 38,055 83,775 8,112 14,419 -29,943 -69,355
services.
73........ Business 37,518 46,860 16,606 39,540 54,124 86,401 109,491 194,631 55,367 108,230
services.
75........ Automotive 11,698 15,230 19,375 51,798 31,073 67,028 9,480 16,851 -21,593 -50,177
repair,
services, &
parking.
76........ Miscellaneous 4,164 5,406 1,373 4,213 5,537 9,618 1,586 2,819 -3,951 -6,800
repair
services.
78........ Motion pictures 3,470 4,419 4,283 19,485 7,753 23,904 10,446 18,570 2,693 -5,334
79........ Amusement & 7,987 10,088 5,622 16,716 13,609 26,804 10,573 18,795 -3,035 -8,009
recreation
services.
80........ Health services 48,132 60,026 37,155 103,356 85,287 163,382 114,546 203,617 29,259 40,235
81........ Legal services. 10,263 13,361 2,246 8,969 12,509 22,329 42,821 76,119 30,313 53,790
82........ Educational 1,878 2,412 14,052 40,243 15,930 42,655 155,178 275,844 139,248 233,189
services.
83........ Social services 12,637 16,039 9,438 21,396 22,075 37,435 12,498 22,216 -9,577 -15,219
84........ Museums, art 455 574 294 858 749 1,432 1,009 1,794 260 362
galleries, &
botanical &
zoological
gardens.
86........ Membership 4,425 5,701 1,396 9,151 5,821 14,851 8,252 14,668 2,430 -183
organizations.
87........ Engineering, 20,847 26,721 7,828 23,332 28,675 50,053 71,813 127,656 43,138 77,602
accounting,
research,
management, &
related
services.
89........ Services, not 1,080 1,405 206 488 1,286 1,892 1,205 2,143 -81 251
elsewhere
classified 4.
-----------------
Services 183,651 232,645 147,933 414,307 331,584 646,952 567,471 1,008,736 235,887 361,784
Subtotal.
Private 521,396 660,266 327,832 871,621 849,228 1,531,887 1,061,273 1,886,519 212,045 354,632
Industry.
State & Local 14,033 19,695 7,012 23,911 21,045 43,606 48,495 86,205 27,450 42,599
Government.
-----------------
Total....... 535,429 679,961 334,844 895,532 870,273 1,575,493 1,109,768 1,972,724 239,495 397,231
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Unless otherwise noted, data are from USDOC (2001a). Na: Data not available. Nc: Not calculable.
1 Number of employers are derived from the U.S. Department of Commerce, Bureau of Census, 1992 Enterprise Statistics.
2 Employment is estimated when data suppression occurs.
3 Sales data for industries 07, 08, 09, and 89 are from the D&B (2001a) database.
4 Number of establishments, number of employees, and annual payroll are derived from the USDOC (1999) database. Sales data are derived from the D&B
(2001a) database.
5 Only includes Railroad Switching and Terminal Establishments (SIC 4013).
6 All data for the U.S. Postal Service are from USPS (1997).
7 Data do not include large certificated passenger carriers that report to the Office of Airline Statistics, U.S. Department of Transportation.
Sources: CONSAD Research Corporation and the U.S. Department of Labor; U.S. Department of Commerce, Bureau of the Census (USDOC, 2001a), 1997 Economic
Census: Comparative Statistics, downloaded from http://www.census.gov/epcd/ec97sic/index.htmldownload; U.S. Department of Commerce, Bureau of
the Census (USDOC (1999), 1997 County Business Patterns; Dun & Bradstreet (D&B, 2001a) National Profile of Businesses Database for Fiscal Year 2000;
Dun & Bradstreet (D&B, 2001b), Industry Norms and Key Business Ratios for Fiscal Year 2000/2001; U.S. Department of the Treasury, Internal Revenue
Service (IRS, 2000) Corporate Tax Returns for Active Corporations for 1997; and U.S. Postal Service (USPS, 1997), 1997 Annual Report.
Small Business Cost Estimates
The upper bound small business cost estimate for the proposed rule
ranges from $502.4 million to $835.9 million. This includes one-time
implementation costs ranging from $349.3 million to $451.7 million and
recurring payroll costs ranging from $153.1 million to $384.2 million.
The recurring payroll costs as a percentage of total payroll range from
0.02 percent to 0.04 percent, and from 0.07 percent to 0.16 percent of
total pre-tax profits.
The lower bound small business benefit estimate for the proposed
rule ranges from $629.8 million to $1,119.4 million. These estimates do
not include significant, but difficult to quantify, benefits such as
the reduced human resource and legal costs for classifying workers
under the proposed rule, and improved management productivity from
reduced investigations and litigation.
The largest recurring payroll costs are incurred by the Personal
Services industry ($17.6 million to $46.6
[[Page 15580]]
million), Construction ($16.7 million to $39.4 million), Automotive
Repair, Services, and Parking ($13.9 million to $37.1 million),
Agricultural Services ($10.4 million to $26.4 million), and Real Estate
($9.9 million to $26.3 million). The 10 industries with the highest
costs account for 57.4 percent to 67.0 percent of the total small
business costs.
The largest recurring payroll costs as a percentage of payroll are
incurred by the Educational Services industry (0.4 percent to 1.0
percent), Agricultural Services (0.2 percent to 0.6 percent), Personal
Services (0.2 percent to 0.4 percent), Transportation by Air (0.1
percent to 0.3 percent), and Automotive Repair, Services, and Parking
(0.1 percent to 0.2 percent).
The largest recurring payroll costs as a percentage of pre-tax
profits are incurred by the General Merchandise Stores (4.5 percent to
10.6 percent), Educational Services (2.0 percent to 5.3 percent),
Agricultural Services (1.1 percent to 2.8 percent), Personal Services
(0.9 percent to 2.4 percent), and Eating and Drinking Places (0.8
percent to 2.2 percent).
State and Local Government Cost and Benefit Estimates
The upper bound cost estimate for State and local governments for
the proposed rule ranges from $21.0 million to $43.6 million. This
includes one-time implementation costs ranging from $14.0 million to
$19.7 million and recurring payroll costs ranging from $7.0 million to
$23.9 million. The cost estimates represents less than 0.005 percent of
the $1.4 trillion in general revenues received by all state and local
governmental entities nationwide, and 0.01 percent to 0.03 percent of
the $150 billion in total payrolls for those entities.
The lower bound benefit estimate for State and local governments
for the proposed rule ranges from $48.5 million to $86.2 million. These
estimates do not include significant, but difficult to quantify,
benefits such as the reduced human resource and legal costs for
classifying workers under the proposed rule, and improved management
productivity from reduced investigations and litigation.
The largest costs are incurred by California ($2.6 million to $5.3
million), New York ($2.3 million to $4.7 million), Texas ($1.3 million
to $2.8 million), Illinois ($1.2 million to $2.5 million), and Florida
($1.1 million to $2.2 million).
The largest recurring payroll costs as a percentage of payroll are
incurred by Arizona (0.2 percent to 0.4 percent), Wyoming (0.2 percent
to 0.4 percent), Alabama (0.1 percent to 0.3 percent), Illinois (0.1
percent to 0.3 percent), and West Virginia (0.1 percent to 0.3
percent). As a percentage of total state and local government revenues,
the recurring payroll costs do not exceed 0.01 percent in any state.
Economic Impact of Updating the Duties Tests
The economic impact of updating the duties tests includes two
components. First, determining whether an employee satisfies the
requirements of the updated duties tests will be less difficult than
determining whether that employee satisfies the requirements of the
current duties tests. As a result, employers will likely incur much
lower costs associated with determining the exempt status of employees,
including conducting expensive time-and-motion studies, and responding
to litigation contesting their exemption decisions. The second
component is the incremental payroll costs that employers would be
required to pay to the employees who satisfy the updated duties test
but do not satisfy the current duties test if the proposed salary level
tests were adopted without simultaneously adopting the proposed duties
tests.
The possible magnitude of the cost savings of the first component
is indicated by the estimated numbers of employees with salaries
between $425 per week and $1,250 per week who would have failed to
satisfy the current duties tests but would pass the updated duties
tests. Because very little evidence is available on the costs for this
component, the only indicator that is available is the potential number
of employees who might require time-and-motion studies or involve
litigation. The PRIA indicates an additional 1.5 million to 2.7 million
employees will be more readily identified as exempt from the overtime
requirements of the FLSA because the updated duties tests will replace
the current duties tests in determining their exemption. Although
certification and adjudication costs would only have been incurred on
behalf of some portion of those employees, the large number of
employees who could bring litigation under the current regulations and
their relatively high levels of compensation indicate that the impact
of revising the duties tests is probably substantial.
The second component of the economic impact of the revised duties
tests is the additional incremental payroll costs that employers would
be required to pay if the revised salary level tests were adopted
without updating duties tests. If the proposed rule had increased the
standard salary level test and highly compensated salary levels to $425
per week and $1,250 per week, respectively, without replacing the
current long duties tests with the updated duties test, employers would
have incurred incremental payroll costs for all executive,
administrative, and professional employees in that salary range who
would satisfy the updated duties test but would not satisfy the current
long duties tests. The PRIA estimates that the incremental payroll
costs for those 1.5 million to 2.7 million employees will be between
$1.839 billion and $3.370 billion, in addition to the $870.2 million to
$1,575.5 million for the regulation as proposed.
Finally, revising the duties tests could result in some paid hourly
workers becoming salaried employees. PRIA data indicate there are
644,000 paid hourly workers working overtime in occupations with exempt
administrative and professional duties that could be converted to
salaried employees. All of these workers have either an associate
degree or 4 year college degree or more and their average income ranges
from $50,100 to $54,700 per year. This is an upper bound estimate based
on the number of professional and administrative workers in occupations
with mixed exempt and nonexempt duties employing a high level of skill
or training.
V. Regulatory Flexibility Act and Executive Order 13272
The Regulatory Flexibility Act of 1980, as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 601 et
seq., requires agencies to prepare regulatory flexibility analyses, and
make them available for public comment, when proposing regulations that
will have ``a significant economic impact on a substantial number of
small entities.'' Accordingly, the following analysis assesses the
impact of these regulations on small entities as defined by the
applicable SBA size standards.
In accordance with E.O. 13272, ``Proper Consideration of Small
Entities in Agency Rulemaking,'' this proposed rule has been reviewed
to assess its potential impact on small businesses, small governmental
jurisdictions, and small organizations, as provided by the Regulatory
Flexibility Act. The Chief Counsel for Advocacy of the Small Business
Administration was notified of a draft of this rule upon submission of
the rule to the Office of Management and Budget under E.O. 12866,
Regulatory Planning and Review.
[[Page 15581]]
(1) Reasons Why Action by Agency Is Being Considered
Section 13(a)(1) of the Fair Labor Standards Act (FLSA), 29 U.S.C.
213(a)(1), directs the Secretary of Labor to define and delimit from
time to time, by regulations subject to the Administrative Procedure
Act, ``any employee employed in a bona fide executive, administrative,
or professional capacity * * * or in the capacity of outside salesman *
* *.'' Employees meeting the criteria specified in these regulations
are completely exempt from minimum wage and overtime pay under the
FLSA. The existing regulations contain requirements for payment ``on a
salary basis,'' at not less than specified minimum amounts, and certain
additional tests related to an employee's primary job duties and
responsibilities. The duties tests were last modified in 1949 and have
remained essentially unchanged since contributing to higher human
resource and legal costs in the economy. The salary levels required for
exemption were last updated in 1975 on an interim basis. In 1999, the
U.S. General Accounting Office reviewed these regulations and
recommended that the Secretary of Labor comprehensively review and
update them, and make necessary changes to better meet the needs of
both employers and employees in the modern work place. These
regulations were also suggested as a candidate for reform in public
comments submitted on OMB's 2001 and 2002 Reports to Congress on the
Costs and Benefits of Regulations. The Department is proposing
revisions to these regulations in response to the concerns that have
been raised over the years to update, clarify and simplify them for the
21st century workplace.
(2) Objectives of and Legal Basis for Rule
This proposed rule is issued pursuant to the authority provided by
section 13(a)(1) of the FLSA. Its objective is to provide clear and
concise regulatory guidance, in plain language, that will assist
employers and employees in determining whether an employee is exempt
from the FLSA as a bona fide executive, administrative, professional,
or outside sales employee.
(3) Number of Small Entities Covered by the Rule
The estimated number of small entities covered by this rule is
presented in the Department's Preliminary Regulatory Impact Analysis
(PRIA). A copy of the Department's complete PRIA may be obtained by
contacting the Wage and Hour Division at the address and telephone
number provided above. Data based on SBA's size standards for small
business entities indicates that 5.2 million establishments that will
be affected by the proposed rule are considered to be small businesses.
These small businesses employ approximately 38.7 million workers with
an annual payroll of $940.0 billion. Their total annual sales are
estimated to be $5.7 trillion and their annual pre-tax profits are
estimated to be $233.9 billion. Approximately 79.8 percent of all
affected establishments are considered to be small businesses and they
account for 38.8 percent of the employment, 33.7 percent of the
payroll, 31.8 percent of the annual sales, and 30.4 percent of the
annual pre-tax profits.
(4) Reporting, Recordkeeping and Other Compliance Requirements of the
Rule
Although an employer claiming an exemption from the FLSA under 29
CFR part 541 must be prepared to establish affirmatively that all
required conditions for the exemption are met, this proposed rule
contains no reporting or recordkeeping requirements as a condition for
the exemption. However, the recordkeeping requirements for employers
claiming exemptions from the FLSA under 29 CFR part 541 for particular
employees are contained in the general FLSA recordkeeping regulations,
applicable to all employers covered by the FLSA (codified at 29 CFR
part 516; see 29 CFR 516.0 and 516.3) and have been approved by the
Office of Management and Budget Control Number 1215-0017. There are no
other compliance requirements under the proposed rule.
(5) Relevant Federal Rules Duplicating, Overlapping or Conflicting With
the Rule
No other Federal rules duplicate or conflict with the requirements
contained in these rules. Federal employees subject to the jurisdiction
of the U.S. Office of Personnel Management (OPM) are governed by
separate regulations administered by OPM and not these regulations.
Some state laws have exemption standards applied under state law that
differ from the exemption standards provided by these Federal rules.
The FLSA does not preempt any stricter exemption standards that may
apply under state law. See 29 U.S.C. 218.
(6) Differing Compliance and Reporting Requirements for Small Entities
The FLSA generally requires employers to pay covered non-exempt
employees at least the federal minimum wage of $5.15 an hour, and time-
and-one-half overtime premium pay for hours worked over 40 per week.
Under the terms of the statute, Congress excluded some smaller
businesses (those with annual revenues less than $500,000) from the
definition of covered ``enterprises'' (although individual workers who
are engaged in interstate commerce or who produce goods for such
commerce may be individually covered by the FLSA). This proposed rule
clarifies and updates the criteria for the statutory exemption from the
FLSA for executive, administrative, professional, and outside sales
employees for all employers covered by the FLSA. Moreover, given the
purpose of the FLSA, Congressional intent, and the statutory provisions
regarding the coverage for smaller businesses, adopting different
compliance requirements for small entities under this rule was not
considered feasible.
(7) Clarification, Consolidation and Simplification of Compliance and
Reporting Requirements for Small Entities
As previously noted, the purpose of this proposed rule is to
clarify, consolidate, simplify, and update the existing criteria for
compliance with the exemption from the FLSA for executive,
administrative, professional, and outside sales employees, for all
businesses including small businesses. The proposed rule contains no
new reporting requirements.
(8) Use of Performance Rather Than Design Standards
The FLSA requires that employers comply with the minimum wage and
overtime pay requirements and permits a number of ways in which
employers can achieve these ``performance standards.''
The Department considered a number of alternatives to the proposed
rule that would impact small entities. One alternative would be not to
change the existing regulations. This alternative was rejected because
the Department has determined that the existing salary tests, which
have not been raised in over 27 years, no longer provide any help in
distinguishing between bona fide executive, administrative, and
professional employees and those who should not be considered for
exemption, and that the duties tests, which were last modified in 1949,
are too complicated, confusing, and outdated for the modern workplace.
Two other alternatives would be to raise the salary levels and not
update the duties tests or conversely to update
[[Page 15582]]
the duties tests without raising the salary levels. However, the
Department has concluded that raising the salary levels is necessary to
reestablish a clear relevant bright-line test between exempt and
nonexempt workers for both employers and employees. Moreover,
increasing the salary levels without updating the duties tests would
increase the cost of the proposed rule by $1.839 billion to $3.370
billion per year--much of which would be incurred by small business.
The duties tests were last revised in 1949 and have remained
essentially unchanged since that time. The salary levels were last
updated in 1975. The Department has determined that updating both the
salary level and duties tests are necessary to better meet the needs of
both employees and employers in the modern workplace and to anticipate
future workplace trends.
Another alternative could be to adjust the salary levels for the
proposed standard test for inflation. However, the Department has never
relied solely on inflation adjustments to determine the appropriate
salary levels, and has decided to continue its long-standing regulatory
practice to reject such mechanical adjustments for inflation. In
addition, the Department has determined that this alternative would be
far too burdensome on small businesses. The PRIA indicates that
adjusting the salary levels for inflation would more than double the
recurring payroll costs of the proposed rule from a range of $335
million to $896 million per year to $747 million to $1,966 million per
year.
Another alternative would be to adjust the salary levels for the
proposed standard test and highly compensated test to levels consistent
with the 1958 Department of Labor report--no more than 10 percent of
those [workers] in the lowest-range--instead of the 20 percent range in
the proposed rule. However, the Department has concluded that this
would exclude overtime protections for a significant number of workers
without having much of an impact on the cost of the proposed rule. The
PRIA indicates that adjusting the salary levels consistent with the
1958 report could exempt 319,000 to 360,000 employees from overtime and
reduce the cost of the proposed rule to $265 million to $719 million
per year. The Department invites comments on the appropriate salary
levels for the proposed standard test and highly compensated test.
(9) Exemption from Coverage of the Rule for Small Entities
As discussed above in section (6) of this analysis, under the terms
of the statute, Congress excluded smaller businesses with annual
revenues less than $500,000 from the definition of covered enterprises
under the FLSA. Given the purpose of the FLSA, Congressional intent,
and the statutory provisions regarding the coverage for smaller
businesses, adopting different compliance requirements for small
entities under this rule was not considered feasible.
VI. Unfunded Mandates Reform Act
The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1501, requires
agencies to prepare a written statement that identifies the: (1)
Authorizing legislation; (2) cost-benefit analysis; (3) macro-economic
effects; (4) summary of state, local, and tribal government input; and
(5) identification of reasonable alternatives and selection, or
explanation of non-selection, of the least costly, most cost-effective
or least burdensome alternative; for proposed rules that include any
Federal mandate that may result in increased expenditures by State,
local, and tribal governments, in the aggregate, or by the private
sector, of $100 million or more in any one year.
(1) Authorizing Legislation
This rule is issued pursuant to section 13(a)(1) of the Fair Labor
Standards Act, 29 U.S.C. 213(a)(1). The section exempts from the FLSA's
minimum wage and overtime pay requirements ``any employee employed in a
bona fide executive, administrative, or professional capacity
(including any employee employed in the capacity of academic
administrative personnel or teacher in elementary or secondary
schools), or in the capacity of outside salesman (as such terms are
defined and delimited from time to time by regulations of the
Secretary, subject to the provisions of the Administrative Procedure
Act * * *).'' The requirements of the exemption provided by this
section of the Act are contained in this rule, 29 CFR part 541.
Section 3(e) of the Fair Labor Standards Act, 29 U.S.C. 203(e)
defines employee to include most individuals employed by a state,
political subdivision of a state, or interstate governmental agency.
Section 3(x) of the Fair Labor Standards Act, 29 U.S.C. 203(x), also
defines public agencies to include the government of a state or
political subdivision thereof, or any interstate governmental agency.
(2) Cost-Benefit Analysis
Over 87,400 State and local governmental entities will be affected
by the proposed rule (3,043 county governments, 19,372 municipal
governments, 16,629 township governments, 34,683 special district
governments, and 13,726 school district governments). Nationwide, these
entities receive more than $1.4 trillion in general revenues, including
revenues from taxes, some categories of fees and charges, and
intergovernmental transfers. Their direct expenditures exceed $1.6
trillion in the aggregate. State and local governments employ more than
4 million workers and their payrolls exceed $12.6 billion per month.
The Department's Preliminary Regulatory Impact Analysis (PRIA)
includes estimates of the implementation costs, incremental payroll
costs, and benefits of the proposed rule for all state and local
government sectors in the aggregate in each state. The results indicate
that the total first year costs of the proposed rule on state and local
government entities range from $21.0 to $43.6 million. This includes
$14.0 to $19.7 million in first year (nonrecurring) implementation
costs and $7.0 to $23.9 million in recurring incremental payroll costs.
The first year costs represent less than three one-thousandths percent
(0.003 percent) of the $1.434 trillion in general revenues received by
all state and local government entities nationwide, and three one-
hundredths percent (0.03 percent) of the $150.8 billion in total
payrolls for those entities. The recurring incremental payroll costs
are about one-half these very small amounts.
The Department's PRIA estimates that the benefits of the proposed
rule for all state and local government sectors range from $48.5 to
$86.2 million. These estimates exclude difficult to quantify benefits
such as lower human resource costs and additional lower legal and
settlement costs stemming from unintentionally misclassifying workers.
The PRIA results indicate that the benefits of the proposed rule will
exceed the costs for state and local governments in every year.
However, State and local governments, as employers covered by the
monetary requirements of the FLSA, will need to raise any such
additional revenues required, however minimal, to meet their future
compliance obligations if the proposed rule is adopted. The FLSA does
not provide for Federal financial assistance or other Federal resources
to meet the requirements of its intergovernmental mandates. The Federal
mandate imposed by the rule is not expected to have measurable effects
on health, safety, or the natural environment.
[[Page 15583]]
(3) Macro-Economic Effects
Agencies are expected to estimate the effect of a regulation on the
national economy, such as the effect on productivity, economic growth,
full employment, creation of productive jobs, and international
competitiveness of United States goods and services, if accurate
estimates are reasonably feasible and the effect is relevant and
material. 5 U.S.C. 1532(a)(4). However, OMB guidance on this
requirement notes that such macro-economic effects tend to be
measurable in nationwide econometric models only if the economic impact
of the regulation reaches 0.25 percent to 0.5 percent of Gross Domestic
Product, or in the range of $1.5 billion to $3.0 billion. A regulation
with smaller aggregate effect is not likely to have a measurable impact
in macro-economic terms unless it is highly focused on a particular
geographic region or economic sector, which is not the case with this
proposed rule.
The Department's PRIA estimates that the total aggregate economic
impact of this proposed rule ranges from $870.3 million to $1,575.5
million. However, as noted in the previous section summarizing the
Department's PRIA, these are upper bound estimates and the actual costs
and impacts expected to be incurred by employers, including state and
local governments, if the proposed rule were adopted, are likely to be
lower. Therefore, given OMB's guidance, the Department has determined
that a full macro-economic analysis is not likely to show any
measurable impact on the economy.
(4) Summary of State, Local, and Tribal Government Input
Congress amended the FLSA in 1985 to readjust how the Act would
apply to the public sector. The 1985 amendments allowed compensatory
time off in lieu of cash overtime pay, partial overtime exemptions for
police and fire departments, the use of unpaid volunteers in certain
circumstances, and a temporary phase-in period for meeting FLSA
compliance obligations. However, Congress enacted no special provisions
for public agencies related to the section 13(a)(1) exemptions or the
541 regulations. Consequently, the same rules for distinguishing 541-
exempt employees from nonexempt employees that apply in the private
sector were initially applied to the public sector following the 1985
amendments.
Since 1985, State and local governments have confronted FLSA
compliance issues and the 541 regulations have been among the foremost
of their concerns, particularly in the administrative exemption
category. Many State and local governments classified nearly all of
their non-supervisory ``white collar'' workers as exempt administrative
employees without regard to whether their primary duty relates directly
to agency management policies or general business operations or meets
the discretion and independent judgment test. In the late 1980s,
several Governors and State and local government agencies urged the
Department to exempt classifications such as social workers,
detectives, probation officers, and others, to avoid disrupting the
level of public services that would result from increasing costs or
limiting the hours of service due to overtime requirements. In 1989,
former Labor Secretary Elizabeth Dole, in a widely disseminated
response to 13 Governors, confirmed the nature of the administrative
exemption's duties test as applied to public sector employees but
solicited specific input with accompanying rationale for what should be
changed. Responses were limited but argued generally that government
services are unique because of the impact on health, safety, welfare or
liberty of citizens. This, they argued, should allow exemption of
positions in law enforcement and criminal justice, human services,
health care and rehabilitation services, and the unemployment
compensation systems, regardless of whether any particular employee's
job duties include important decision-making on how the agency is
operated or managed internally. They also urged the Department to
redefine the professional exemption to recognize a broader contemporary
use of that term in government employment.
In the midst of a growing wave of private lawsuits filed by public
employees against their employers challenging their exempt status, a
series of court decisions were rendered that sharply limited public
employers' ability to successfully assert exemption under the ``salary
basis'' rule. This led the Department to alter the ``salary basis''
rules to provide specific relief to public employers in a final rule
issued in August 1992 (57 FR 37666; Aug. 19, 1992). Under this special
rule, the fact that a public sector pay and leave system includes
partial-day deductions from pay for absences not covered by accrued
paid leave becomes irrelevant to determining any public sector
employee's eligibility for exemption.
Public sector employers have been less vocal over FLSA issues since
the Department's 1992 rulemaking allowing partial-day (or hourly)
deductions from pay for employee absences not covered by accrued leave
and other special ``salary basis'' rules for budget-driven furloughs
(29 CFR 541.5d). The U.S. Supreme Court's 1997 decision in Auer v.
Robbins, 519 U.S. 452 (1997), a public sector case involving the City
of St. Louis Police Department and disciplinary deductions from pay,
may also have relieved many concerns of public agencies over pay
docking for discipline.
Although public agency organizations were invited to the
Department's stakeholder meetings to address concerns over the 541
regulations, they mostly did not respond to the invitations. The
International Personnel Management Association, accompanied by the
National Public Employers Labor Relations Association and the U.S.
Conference of Mayors, suggested that progressive discipline systems are
common in the public sector (some collectively bargained) and the
``salary basis'' rule for exempt workers, which prohibits disciplinary
deductions except for major safety rules, threatens such systems.
Representatives of the Interstate Labor Standards Association (ILSA)
submitted written views suggesting that the salary threshold be indexed
to the current minimum wage or some multiple thereof (e.g., 3 times the
minimum wage for a 40-hour workweek or $618 per week). One additional
idea was to relate the salary levels to those of the supervised
employees.
The proposed rule would revise and simplify the exemptions' duties
tests, but would continue to apply the same basic duties tests in both
the public and private sectors. The public sector is governed by a
different set of pay-docking rules and additional proposed revisions in
this rule would broaden permissible disciplinary deductions to include
sanctions for infractions such as sexual harassment and work place
violence. However, a broader or separate duties test rule applicable
solely to the public sector does not seem warranted at this time, as
the case has not been made for such separate treatment. The Department
is interested in receiving specific public comments on any issues of
concern to public employees and public employers, and will carefully
examine any such public comments submitted on this proposal during the
rulemaking process.
(5) Least Burdensome Option or Explanation Required
The Department's consideration of various options is described in
the preceding section in the preamble on the Regulatory Flexibility Act
and Executive Order 13272. The Department
[[Page 15584]]
believes that it has chosen the least burdensome option that updates,
clarifies, and simplifies the rule. One alternative option would have
set the exemptions' salary level at a rate lower than the proposed $425
per week, which might impose lower direct payroll costs on employers
but may not necessarily be the most cost-effective or least burdensome
alternative for employers. A lower salary level could result in a less
effective ``bright-line'' test that separates exempt workers from those
nonexempt workers whom Congress intended to cover by the Act. Greater
ambiguity regarding who is exempt and nonexempt increases the potential
legal liability from unintentionally misclassifying workers, and thus
the ultimate cost of the regulation.
VII. Effects on Families
This rule has been assessed under section 654 of the Treasury and
General Government Appropriations Act, 1999, for its effect on family
well-being and the undersigned hereby certifies that the rule will not
adversely affect the well-being of families.
VIII. Executive Order 13045, Protection of Children
In accordance with Executive Order 13045, the Department has
evaluated this rule and determined that it has no environmental health
risk or safety risk that may disproportionately affect children.
IX. Executive Order 13132, Federalism
This rule will not have ``substantial direct effects on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government.'' Under the terms of section 6 of E.O. 13132, it
has been determined that this rule does not have sufficient federalism
implications to warrant the preparation of a federalism summary impact
statement.
This rule is issued pursuant to section 13(a)(1) of the Fair Labor
Standards Act, 29 U.S.C. 213(a)(1). The section exempts from the FLSA's
minimum wage and overtime pay requirements ``any employee employed in a
bona fide executive, administrative, or professional capacity
(including any employee employed in the capacity of academic
administrative personnel or teacher in elementary or secondary
schools), or in the capacity of outside salesman (as such terms are
defined and delimited from time to time by regulations of the
Secretary, subject to the provisions of the Administrative Procedure
Act * * *).'' The requirements of the exemption provided by this
section of the Act are contained in this rule, 29 CFR part 541.
Section 3(e) of the Fair Labor Standards Act, 29 U.S.C. 203(e),
defines employee to include most individuals employed by a state,
political subdivision of a state, or interstate governmental agency.
Section 3(x) of the Fair Labor Standards Act, 29 U.S.C. 203(x), also
defines public agencies to include the government of a state or
political subdivision thereof, or any interstate governmental agency.
The Department's Preliminary Regulatory Impact Analysis (PRIA)
estimates the implementation costs, incremental payroll costs, and
benefits of the proposed rule for all state and local government
sectors in the aggregate in each state. The results indicate that the
total first year costs of the proposed rule on state and local
government entities range from $24.1 to $43.6 million. This includes
$14.0 to $19.7 million in first year (nonrecurring) implementation
costs and $10.1 to $23.9 million in recurring incremental payroll
costs. The first year costs represent less than three one-thousandths
percent (0.003 percent) of the $1.434 trillion in general revenues
received by all state and local government entities nationwide, and
three one-hundredths percent (0.03 percent) of the $150.8 billion in
total payrolls for those entities. The recurring incremental payroll
costs are about one-half these very small amounts.
The Department's PRIA also estimates that the benefits of the
proposed rule for all state and local government sectors range from
$48.5 to $86.2 million. These estimates exclude difficult to quantify
benefits such as lower human resource costs and additional lower legal
and settlement costs stemming from unintentionally misclassifying
workers. The PRIA results indicate that the benefits of the proposed
rule will exceed the costs for state and local governments in every
year. The Federal mandate imposed by the rule is not expected to have
substantial direct effects on the States and will not affect the
current relationship between the national government and the states or
the distribution of power and responsibilities among the various levels
of government.
X. Executive Order 13175, Indian Tribal Governments
This rule was reviewed under the terms of E.O. 13175 and determined
not to have ``tribal implications.'' The rule does not have
``substantial direct effects on one or more Indian tribes, on the
relationship between the Federal government and Indian tribes, or on
the distribution of power and responsibilities between the Federal
government and Indian tribes.'' As a result, no tribal summary impact
statement has been prepared.
XI. Executive Order 12630, Constitutionally Protected Property Rights
This rule is not subject to E.O. 12630 because it does not involve
implementation of a policy ``that has takings implications'' or that
could impose limitations on private property use.
XII. Executive Order 12988, Civil Justice Reform Analysis
This rule was drafted and reviewed in accordance with E.O. 12988
and will not unduly burden the federal court system. The rule was: (1)
Reviewed to eliminate drafting errors and ambiguities; (2) written to
minimize litigation; and (3) written to provide a clear legal standard
for affected conduct, and to promote burden reduction.
XIII. Executive Order 13211, Energy Supply
This rule is not subject to E.O. 13211. It will not have a
significant adverse effect on the supply, distribution, or use of
energy.
XIV. Environmental Impact Assessment
The Department has reviewed this rule in accordance with the
requirements of the National Environmental Policy Act (NEPA) of 1969
(42 U.S.C. 4321 et seq.), the regulations of the Council on
Environmental Quality (40 U.S.C. 1500), and the Department's NEPA
procedures (29 CFR part 11). The rule will not have a significant
impact on the quality of the human environment, and, thus, the
Department has not conducted an environmental assessment or an
environmental impact statement.
List of Subjects in 29 CFR Part 541
Labor, Minimum wages, Overtime pay, Salaries, Teachers, Wages.
Signed in Washington, DC, this 25th day of March, 2003.
Tammy D. McCutchen,
Administrator, Wage and Hour Division.
For the reasons set forth above, 29 CFR part 541 is proposed to be
amended as set forth below.
[[Page 15585]]
PART 541--DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE,
ADMINISTRATIVE, PROFESSIONAL, COMPUTER AND OUTSIDE SALES EMPLOYEES
Subpart A--General Regulations
Sec.
541.0 Introductory statement.
541.1 Terms defined.
541.2 Job titles insufficient.
Subpart B--Executive Employees
541.100 General rule for executive employees.
541.101 Business owner.
541.102 Sole charge executive.
541.103 Management of the enterprise.
541.104 Department or subdivision.
541.105 Two or more other employees.
541.106 Working supervisors.
541.107 Supervisors in retail establishments.
Subpart C--Administrative Employees
541.200 General rule for administrative employees.
541.201 Related to management or general business operations.
541.202 Position of responsibility.
541.203 Work of substantial importance.
541.204 High level of skill or training.
541.205 Educational establishments.
Subpart D--Professional Employees
541.300 General rule for professional employees.
541.301 Learned professionals.
541.302 Creative professionals.
541.303 Teachers.
541.304 Practice of law or medicine.
Subpart E--Computer Employees
541.400 General rule for computer employees.
541.401 High level of skill and expertise.
541.402 Computer operation, manufacture and repair.
541.403 Executive and administrative computer employees.
Subpart F--Outside Sales Employees
541.500 General rule for outside sales employees.
541.501 Making sales or obtaining orders.
541.502 Away from employer's place of business.
541.503 Promotion work.
541.504 Drivers who sell.
Subpart G--Salary Requirements
541.600 Amount of salary required.
541.601 Highly compensated employees.
541.602 Salary basis.
541.603 Effect of improper deductions from salary.
541.604 Minimum guarantee plus extras.
541.605 Fee basis.
541.606 Board, lodging or other facilities.
Subpart H--Definitions and Miscellaneous Provisions
541.700 Primary duty.
541.701 Customarily and regularly.
541.702 Exempt and nonexempt work.
541.703 Directly and closely related.
541.704 Trainees.
541.705 Emergencies.
541.706 Occasional tasks.
541.707 Combination exemptions.
541.708 Motion picture producing industry.
541.709 Employees of public agencies.
Authority: 29 U.S.C. 213; Pub. L. 101-583, 104 Stat. 2871;
Reorganization Plan No. 6 of 1950 (3 CFR 1945-53 Comp. p. 1004);
Secretary's Order No. 4-2001 (66 FR 29656).
Subpart A--General Regulations
Sec. 541.0 Introductory statement.
(a) Section 13(a)(1) of the Fair Labor Standards Act, as amended,
provides an exemption from the Act's minimum wage and overtime
requirements for any employee employed in a bona fide executive,
administrative, or professional capacity (including any employee
employed in the capacity of academic administrative personnel or
teacher in elementary or secondary schools), or in the capacity of an
outside sales employee, as such terms are defined and delimited from
time to time by regulations of the Secretary, subject to the provisions
of the Administrative Procedure Act. Section 13(a)(17) of the Act
provides an exemption from the minimum wage and overtime requirements
for computer systems analysts, computer programmers, software
engineers, and other similarly skilled computer employees.
(b) The requirements for these exemptions are contained in this
part as follows: executive employees, subpart B; administrative
employees, subpart C; professional employees, subpart D; computer
employees, subpart E; outside sales employees, subpart F. Subpart G
contains regulations regarding salary requirements applicable to most
of the exemptions, including salary levels and the salary basis test.
Subpart G also contains a provision for exempting certain highly
compensated employees. Subpart H contains definitions and other
miscellaneous provisions applicable to all or several of the
exemptions.
(c) Effective July 1, 1972, the Fair Labor Standards Act was
amended to include within the protection of the equal pay provisions
those employees exempt from the minimum wage and overtime pay
provisions as bona fide executive, administrative, and professional
employees (including any employee employed in the capacity of academic
administrative personnel or teacher in elementary or secondary
schools), or in the capacity of an outside sales employee under section
13(a)(1) of the Act. The equal pay provisions in section 6(d) of the
Fair Labor Standards Act are administered and enforced by the United
States Equal Employment Opportunity Commission.
Sec. 541.1 Terms defined.
Act means the Fair Labor Standards Act of 1938, as amended.
Administrator means the Administrator of the Wage and Hour
Division, United States Department of Labor. The Secretary of Labor has
delegated to the Administrator the functions vested in the Secretary
under sections 13(a)(1) and 13(a)(17) of the Fair Labor Standards Act.
Sec. 541.2 Job titles insufficient.
A job title alone is insufficient to establish the exempt status of
an employee. The exempt or nonexempt status of any particular employee
must be determined on the basis of whether the employee's salary and
duties meet the requirements of the regulations in this part.
Subpart B--Executive Employees
Sec. 541.100 General rule for executive employees.
(a) The term ``employee employed in a bona fide executive
capacity'' in section 13(a)(1) of the Act shall mean any employee:
(1) Compensated on a salary basis at a rate of not less than $425
per week (or $360 per week, if employed in American Samoa by employers
other than the Federal Government), exclusive of board, lodging or
other facilities;
(2) With a primary duty of the management of the enterprise in
which the employee is employed or of a customarily recognized
department or subdivision thereof;
(3) Who customarily and regularly directs the work of two or more
other employees; and
(4) Who has the authority to hire or fire other employees or whose
suggestions and recommendations as to the hiring, firing, advancement,
promotion or any other change of status of other employees will be
given particular weight.
(b) The phrase ``salary basis'' is defined at Sec. 541.602;
``board, lodging or other facilities'' is defined at Sec. 541.606;
``primary duty'' is defined at Sec. 541.700; and ``customarily and
regularly'' is defined at Sec. 541.701.
Sec. 541.101 Business owner.
The term ``employee employed in a bona fide executive capacity'' in
section 13(a)(1) of the Act also includes any employee who owns at
least a 20-percent equity interest in the enterprise in which the
employee is employed, regardless of whether the business is a corporate
or other type of organization.
[[Page 15586]]
The requirements of subpart G (salary requirements) of this part do not
apply to the business owners described in this section.
Sec. 541.102 Sole charge executive.
(a) The term ``employee employed in a bona fide executive
capacity'' in section 13(a)(1) of the Act also includes any employee
compensated on a salary basis at a rate of not less than $425 per week
(or $360 per week, if employed in American Samoa by employers other
than the Federal Government), exclusive of board, lodging or other
facilities, who is in sole charge of an independent establishment or a
physically separated branch establishment.
(b) The term ``sole charge'' means that the employee ordinarily
must be in charge of the company activities at the location where the
employee is employed. Thus, to qualify as a ``sole charge'' executive,
the employee must have authority to make decisions regarding the day-
to-day operations of the establishment and to direct the work of any
other employees at the establishment or branch. Only one person in any
establishment can qualify as a sole charge executive, and then only if
that person is the top person in charge at that location. The ``sole-
charge'' status of an employee will not be considered lost because of
an occasional visit to the establishment or branch office of a
superior.
(c) The phrase ``independent establishment or a physically
separated branch establishment'' means an establishment that has a
fixed location and is geographically separated from other company
property. The management of operations within one of several buildings
located on single or adjoining tracts of company property does not
qualify for the exemption under this section. In the case of a branch,
there must be a true and complete physical separation from the main
office.
(d) A leased department may qualify as an independent establishment
when the lessee operates under a separate trade name, with its own
separate employees and records, and in other respects conducts the
lessee's business independently of the lessor's. In such a case the
leased department would enjoy the same status as a physically separated
branch establishment. A leased department cannot be considered an
independent establishment when the lessor has authority over such
matters as hiring and firing of employees, other personnel policies,
advertising, purchasing, pricing, credit operations, insurance and
taxes.
Sec. 541.103 Management of the enterprise.
Generally, ``management of the enterprise'' includes activities
such as interviewing, selecting, and training of employees; setting and
adjusting their rates of pay and hours of work; directing the work of
employees; maintaining production or sales records for use in
supervision or control; appraising employees' productivity and
efficiency; handling employee complaints and grievances; disciplining
employees; planning the work; determining the techniques to be used;
apportioning the work among the employees; determining the type of
materials, supplies, machinery or tools to be used or merchandise to be
bought, stocked and sold; controlling the flow and distribution of
materials or merchandise and supplies; and providing for the safety of
the employees or the property.
Sec. 541.104 Department or subdivision.
(a) The phrase ``a customarily recognized department or
subdivision'' is intended to distinguish between a mere collection of
employees assigned from time to time to a specific job or series of
jobs and a unit with permanent status and function. A customarily
recognized department or subdivision must have a permanent status and a
continuing function. For example, a large employer's human resources
department might have subdivisions for labor relations, pensions and
other benefits, equal employment opportunity, and personnel management,
each of which has a permanent status and function.
(b) When an enterprise has more than one establishment, the
employee in charge of each establishment may be considered in charge of
a recognized subdivision of the enterprise. The employee also may
qualify for the sole charge exemption, if all of the requirements of
Sec. 541.102 are satisfied.
(c) A recognized department or subdivision need not be physically
within the employer's establishment and may move from place to place.
The mere fact that the employee works in more than one location does
not invalidate the exemption if other factors show that the employee is
actually in charge of a recognized unit with a continuing function in
the organization.
(d) Continuity of the same subordinate personnel is not essential
to the existence of a recognized unit with a continuing function. An
otherwise exempt employee will not lose the exemption merely because
the employee draws and supervises workers from a pool or supervises a
team of workers drawn from other recognized units, if other factors are
present that indicate that the employee is in charge of a recognized
unit with a continuing function.
Sec. 541.105 Two or more other employees.
(a) To qualify as an exempt executive under Sec. 541.100, the
employee must customarily and regularly direct the work of two or more
other employees. The phrase ``two or more other employees'' means two
full-time employees or their equivalent. One full-time and two half-
time employees, for example, are equivalent to two full-time employees.
Four half-time employees are also equivalent.
(b) The supervision can be distributed among two, three or more
employees, but each such employee must customarily and regularly direct
the work of two or more other full-time employees or the equivalent.
Thus, for example, a department with five full-time non-exempt workers
may have up to two exempt supervisors if each such supervisor
customarily and regularly directs the work of two of those workers.
(c) An employee who merely assists the manager of a particular
department and supervises two or more employees only in the actual
manager's absence does not meet this requirement.
(d) Hours worked by an employee cannot be credited more than once
for different executives. Thus, a shared responsibility for the
supervision of the same two employees in the same department does not
satisfy this requirement. However, a full-time employee who works four
hours for one supervisor and four hours for a different supervisor, for
example, can be credited as a half-time employee for both supervisors.
Sec. 541.106 Working supervisors.
Employees, sometimes called ``working foremen'' or ``working
supervisors,'' who have some supervisory functions, such as directing
the work of other employees, but also perform work unrelated or only
remotely related to the supervisory activities are not exempt
executives if, instead of having management as their primary duty as
required in Sec. 541.100, their primary duty consists of either the
same kind of work as that performed by their subordinates; work that,
although not performed by their own subordinates, consists of ordinary
production or sales work; or routine, recurrent or repetitive tasks.
Sec. 541.107 Supervisors in retail establishments.
Supervisors in retail establishments often perform work such as
serving
[[Page 15587]]
customers, cooking food, stocking shelves, cleaning the establishment
or other non-exempt work. Performance of such non-exempt work by a
supervisor in a retail establishment does not disqualify the employee
from the exemption if the requirements of Sec. 541.100 are otherwise
met. Thus, an assistant manager whose primary duty includes such
activities as scheduling employees, assigning work, overseeing product
quality, ordering merchandise, managing inventory, handling customer
complaints, authorizing payment of bills or performing other management
functions may be an exempt executive even though the assistant manager
spends the majority of the time on non-exempt work.
Subpart C--Administrative Employees
Sec. 541.200 General rule for administrative employees.
(a) The term ``employee employed in a bona fide administrative
capacity'' in section 13(a)(1) of the Act shall mean any employee:
(1) Compensated on a salary or fee basis at a rate of not less than
$425 per week (or $360 per week, if employed in American Samoa by
employers other than the Federal Government), exclusive of board,
lodging or other facilities;
(2) With a primary duty of the performance of office or non-manual
work related to the management or general business operations of the
employer or the employer's customers; and
(3) Who holds a position of responsibility with the employer.
(b) The term ``salary basis'' is defined at Sec. 541.602; ``fee
basis'' is defined at Sec. 541.605; ``board, lodging or other
facilities'' is defined at Sec. 541.606; and ``primary duty'' is
defined at Sec. 541.700.
Sec. 541.201 Related to management or general business operations.
(a) To qualify for the administrative exemption, an employee must
perform work related to the management or general business operations
of the employer or the employer's customers. The phrase ``related to
management or general business operations'' refers to the type of work
performed by the employee. To meet this requirement, an employee must
perform work related to assisting with the running or servicing of the
business, as distinguished, for example, from working on a
manufacturing production line or selling a product.
(b) Work related to management or general business operations
includes, for example, work in areas such as tax, finance, accounting,
auditing, insurance, quality control, purchasing, procurement,
advertising, marketing, research, safety and health, personnel
management, human resources, employee benefits, labor relations, public
relations, government relations and similar activities. Some of these
activities may be performed by employees who also would qualify for
another exemption. For example, a tax attorney and an accountant likely
are performing work that qualifies for the professional exemption.
(c) An employee may qualify for the administrative exemption if the
employee performs work related to the management or general business
operations of the employer's customers. Thus, for example, employees
acting as advisers and consultants to their employer's clients or
customers (as tax experts or financial consultants, for example) may be
exempt.
Sec. 541.202 Position of responsibility.
To qualify for the administrative exemption, an employee must hold
a position of responsibility with the employer. The phrase ``position
of responsibility'' refers to the importance to the employer of the
work performed or the high level of competence required by the work
performed. To meet this requirement, an employee must either
customarily and regularly perform work of substantial importance or
perform work requiring a high level of skill or training. The phrase
``customarily and regularly'' is defined at Sec. 541.710.
Sec. 541.203 Work of substantial importance.
(a) The phrase ``work of substantial importance'' means work that,
by its nature or consequence, affects the employer's general business
operations or finances to a significant degree.
(b) Work of substantial importance includes activities such as
formulating, interpreting or implementing management policies;
providing consultation or expert advice to management; making or
recommending decisions that have a significant impact on general
business operations or finances; analyzing and recommending changes to
operating practices; planning long or short-term business objectives;
analyzing data, drawing conclusions and recommending changes; handling
complaints, arbitrating disputes or resolving grievances; representing
the company during important contract negotiations; and work of similar
impact on general business operations or finances. Work of substantial
importance thus is not limited to employees who participate in the
formulation of management policies or in the operation of the business
as a whole. It includes the work of employees who carry out major
assignments in conducting the operations of the business, or whose work
affects general business operations to a significant degree, even
though their assignments are tasks related to the operation of a
particular segment of the business.
(1) For example, an employee who is a buyer of a particular type of
equipment in an industrial plant or who is an assistant buyer for a
retail or service establishment may have a significant impact on the
business, even though the work may be limited to purchasing for a
particular department. Similarly, although comparison shopping by an
employee who merely reports findings on a competitor's prices is not
work of substantial importance, the buyer who evaluates such reports to
set the employer's prices does perform work of substantial importance.
(2) Insurance claims adjusters also generally perform work of
substantial importance, whether they work for an insurance company or
other type of company, if their duties include activities such as
interviewing insureds, witnesses and physicians; inspecting property
damage; reviewing factual information to prepare damage estimates;
evaluating and making recommendations regarding coverage of claims;
determining liability and total value of a claim; negotiating
settlements; and making recommendations regarding litigation.
(3) An employee who leads a team of other employees assigned to
complete a major project for the employer (such as purchasing, selling
or closing all or part of the business, negotiating a real estate
transaction or a collective bargaining agreement, or designing and
implementing productivity improvements) performs work of substantial
importance, even if the employee does not have direct supervisory
responsibility over the other employees on the team.
(4) Other employees that perform work of substantial importance,
even if their decisions or recommendations are reviewed for possible
modification or rejection at a higher level, include: a human resources
manager who formulates employment policies; a management consultant who
studies the operations of a business and proposes change in
organization; a purchasing agent who is required to consult with top
management officials when making a purchase commitment for raw
materials in excess of the contemplated plant needs; or an executive or
administrative assistant to a proprietor or chief executive of a
business if such
[[Page 15588]]
employee, without specific instructions or prescribed procedures, has
been delegated authority to arrange meetings, handle callers and answer
correspondence.
(c) Work of substantial importance does not include clerical or
secretarial tasks, recording or tabulating data, or performing other
mechanical, repetitive, recurrent or routine work. For example, an
employee who simply tabulates data is not exempt, even if labeled as a
``statistician.'' An example of an employee who does not perform work
of substantial importance is a personnel clerk engaged in ``screening''
of applicants (collecting data and rejecting applicants who do not meet
basic qualifications), but who is not involved in making the decision
to hire.
(d) An employer's volume of business may make it necessary to
employ a number of employees to perform the same or similar work. The
fact that many employees perform identical work or work of the same
relative importance does not mean that the work of each such employee
is not work of substantial importance.
(e) The work of an employee does not meet this requirement merely
because the employer will experience financial losses if the employee
fails to perform the job properly. For example, a messenger who is
entrusted with carrying large sums of money does not perform work of
substantial importance even though serious consequences may flow from
the employee's neglect. An employee who operates very expensive
equipment is not performing work of substantial importance merely
because improper performance of the employee's duties may cause serious
financial loss to the employer.
Sec. 541.204 High level of skill or training.
(a) The phrase ``work requiring a high level of skill or training''
means administrative work requiring specialized knowledge or abilities,
or advanced training. The specialized knowledge or abilities need not
be acquired through any particular course of academic training or
study. Also, the high level of training required may involve advanced
academic instruction or advanced on-the-job training, or a combination
of both. Administrative work that satisfies the ``high level of skill
or training'' standard includes advisory work performed for the
management of the company (or for the management of the company's
customers), as is typically performed by financial advisors, tax
advisors, insurance experts, credit managers, employee benefits
experts, human resource consultants, labor relations consultants,
marketing consultants, safety directors, account executives of
advertising agencies and stock brokers. Employees with a high level of
skill or training also may perform special assignments, including
assignments performed away from their employer's place of business if
the employee serves as a field representative for the employer.
(b) Work requiring a high level of skill or training may include
work by employees who use a reference manual. The use of such a manual
can require a high level of skill and training if the manual contains
highly technical, scientific, legal, financial or other similarly
complex information that can be interpreted properly only by those with
advanced training or specialized knowledge or skills. Such manuals are
used to provide guidance in addressing very difficult or novel
circumstances. Thus, if an employee performs administrative work that
satisfies the ``high level of skill or training'' standard, using this
type of reference manual would not affect the employee's exempt status.
(c) Work requiring a high level of skill or training does not
include work requiring the employee simply to look up information (from
a handbook, for example) to determine the correct response to an
inquiry or set of circumstances. Nor does it include clerical or
secretarial work, recording or tabulating data, or other mechanical,
repetitive, recurrent or routine work. Employees such as inspectors,
examiners and graders who use established techniques, procedures or
standards to accept or reject a product do not perform work requiring a
high level of skill or training, even though such employees may have
some leeway in the performance of their work.
Sec. 541.205 Educational establishments.
(a) The term ``employee employed in a bona fide administrative
capacity'' in section 13(a)(1) of the Act also includes employees:
(1) Compensated for services on a salary or fee basis at a rate of
not less than $425 per week (or $360 per week, if employed in American
Samoa by employers other than the Federal Government) exclusive of
board, lodging or other facilities, or on a salary basis which is at
least equal to the entrance salary for teachers in the educational
establishment by which employed; and
(2) With a primary duty of performing administrative functions
directly related to academic instruction or training in an educational
establishment or department or subdivision thereof.
(b) The term ``educational establishment'' means an elementary or
secondary school system, an institution of higher education or other
educational institution. Sections 3(v) and 3(w) of the Act define
elementary and secondary schools as those day or residential schools
that provide elementary or secondary education, as determined under
State law. Under the laws of most States, such education includes the
curricula in grades 1 through 12; under many it includes also the
introductory programs in kindergarten. Such education in some States
may also include nursery school programs in elementary education and
junior college curricula in secondary education. The term ``educational
establishment'' includes special schools for mentally or physically
disabled or gifted children, regardless of any classification of such
schools as elementary, secondary or higher. Also, for purposes of the
exemption, no distinction is drawn between public and private schools,
or between those operated for profit and those that are not for profit.
(c) The phrase ``performing administrative functions directly
related to academic instruction or training'' means work related to the
academic operations and functions in a school rather than to
administration along the lines of general business operations. Such
academic administrative functions include operations directly in the
field of education. Jobs relating to areas outside the educational
field are not within the definition of academic administration.
(1) Employees engaged in academic administrative functions include:
the superintendent or other head of an elementary or secondary school
system, and any assistants, responsible for administration of such
matters as curriculum, quality and methods of instructing, measuring
and testing the learning potential and achievement of students,
establishing and maintaining academic and grading standards, and other
aspects of the teaching program; the principal and any vice-principals
responsible for the operation of an elementary or secondary school;
department heads in institutions of higher education responsible for
the administration of the mathematics department, the English
department, the foreign language department, etc.; and other employees
with similar responsibilities.
(2) Jobs relating to building management and maintenance, jobs
relating to the health of the students, and academic staff such as
social workers, psychologists, lunch room managers or dietitians do not
perform
[[Page 15589]]
academic administrative functions. Although such work is not considered
academic administration, such employees may qualify for exemption under
Sec. 541.200 or under other sections of this part provided the
requirements for such exemptions are met.
Subpart D--Professional Employees
Sec. 541.300 General rule for professional employees.
(a) The term ``employee employed in a bona fide professional
capacity'' in section 13(a)(1) of the Act shall mean any employee:
(1) Compensated on a salary or fee basis at a rate of not less than
$425 per week (or $360 per week, if employed in American Samoa by
employers other than the Federal Government), exclusive of board,
lodging, or other facilities; and
(2) With a primary duty of performing office or non-manual work:
(i) Requiring knowledge of an advanced type in a field of science
or learning customarily acquired by a prolonged course of specialized
intellectual instruction, but which also may be acquired by alternative
means such as an equivalent combination of intellectual instruction and
work experience; or
(ii) Requiring invention, imagination, originality or talent in a
recognized field of artistic or creative endeavor.
(b) The term ``salary basis'' is defined at Sec. 541.602; ``fee
basis'' is defined at Sec. 541.605; ``board, lodging or other
facilities'' is defined at Sec. 541.606; and ``primary duty'' is
defined at Sec. 541.700.
Sec. 541.301 Learned professionals.
(a) Learned professionals must have a primary duty of performing
office or non-manual work requiring advanced knowledge in a field of
science or learning. The term ``advanced knowledge'' means knowledge
that is customarily acquired through a prolonged course of specialized
intellectual instruction, but which also may be acquired by alternative
means such as an equivalent combination of intellectual instruction and
work experience. The learned professions include the professions of
law, medicine, theology, teaching, accounting, actuarial computation,
engineering, architecture, various types of physical, chemical and
biological sciences, pharmacy, and other similar occupations that have
a recognized professional status based on the acquirement of advanced
knowledge and performance of work that is predominantly intellectual in
character as opposed to routine, mental, manual, mechanical or physical
work.
(b) The phrase ``knowledge of an advanced type'' means knowledge
that cannot be attained at the high school level.
(c) The phrase ``field of science or learning'' distinguishes the
learned professions from the mechanical arts where in some instances
the knowledge is of a fairly advanced type, but not in a field of
science or learning.
(d) The phrase ``customarily acquired by a prolonged course of
specialized intellectual instruction'' generally restricts the
exemption to professions where specialized academic training is a
standard prerequisite for entrance into the profession. The best prima
facie evidence that an employee meets this requirement is possession of
the appropriate academic degree. However, the word ``customarily''
means that the exemption is also available to employees in such
professions who have substantially the same knowledge level as the
degreed employees, but who attained such knowledge through a
combination of work experience, training in the armed forces, attending
a technical school, attending a community college or other intellectual
instruction.
(e) The following professions have been found by the Administrator
generally to meet the primary duty requirement for learned
professionals in Sec. 541.300(b)(1):
(1) Registered or certified medical technologists. Registered or
certified medical technologists who have successfully completed three
academic years of pre-professional study in an accredited college or
university plus a fourth year of professional course work in a school
of medical technology approved by the Council of Medical Education of
the American Medical Association.
(2) Registered nurses. Nurses who are registered by the appropriate
State examining board.
(3) Dental hygienists. Dental hygienists who have successfully
completed four academic years of pre-professional and professional
study in an accredited college or university approved by the Commission
on Accreditation of Dental and Dental Auxiliary Educational Programs of
the American Dental Association.
(4) Physician assistants. Physician assistants who have
successfully completed three years of pre-professional study (or 2,000
hours of patient care experience in a military or civilian occupation
such as laboratory technology, nursing, psychology, biology, or related
activity) plus not less than one year of professional course work in a
medical school or hospital.
(5) Accountants. Certified public accountants, except in unusual
cases, meet the primary duty requirement for the learned professional
exemption. In addition, many other accountants who are not certified
public accountants but perform similar job duties may qualify as exempt
learned professionals. However, accounting clerks and other employees
who normally perform a great deal of routine work generally will not
qualify as exempt professionals.
(6) Chefs. Chefs, such as executive chefs and sous chefs, who have
attained a college degree in a culinary arts program, meet the primary
duty requirement for the learned professional exemption.
(f) Professional occupations do not include those whose duties may
be performed with the general knowledge acquired by an academic degree
in any field or with knowledge acquired through an apprenticeship or
from training in routine mental, manual or physical processes. Thus,
for example, the professional exemption does not apply to occupations
such as carpenters, electricians, mechanics, plumbers, iron workers,
craftsmen, operating engineers, longshoremen, construction workers,
teamsters and other employees who perform manual work that does not
require an advanced academic degree.
(g) The areas in which professional exemptions may be available are
expanding. As knowledge is developed, academic training is broadened
and specialized degrees are offered in new and diverse fields, thus
creating new specialists in particular fields of science or learning.
When a specialized degree has become a standard requirement for a
particular occupation, that occupation may have acquired the
characteristics of a learned profession.
Sec. 541.302 Creative professionals.
(a) Creative professionals must have a primary duty of performing
office or non-manual work requiring invention, imagination, originality
or talent in a recognized field of artistic or creative endeavor as
opposed to routine mental, manual, mechanical or physical work. The
exemption does not apply to work which can be produced by a person with
general manual ability and training.
(b) To qualify for exemption as a creative professional, the work
performed must be ``in a recognized field of artistic or creative
endeavor.'' This includes such fields as music, writing, acting and the
graphic arts.
(c) The requirement of ``invention, imagination, originality or
talent'' distinguishes the creative professions from work that
primarily depends on
[[Page 15590]]
intelligence, diligence and accuracy. This requirement generally is met
by actors, musicians, composers, conductors, and soloists; painters who
at most are given the subject matter of their painting; cartoonists who
are merely told the title or underlying concept of a cartoon and must
rely on their own creative ability to express the concept; essayists,
novelists, short-story writers and screen play writers who choose their
own subjects and hand in a finished piece of work to their employers
(the majority of such persons are, of course, not employees but self-
employed); and persons holding the more responsible writing positions
in advertising agencies. This requirement generally is not met by a
person who is employed as a copyist, as an ``animator'' of motion-
picture cartoons, or as a retoucher of photographs, since such work is
not properly described as creative in character.
(d) Journalists may qualify as creative professionals if their work
generally requires invention, imagination, originality or talent.
Writers for newspapers, news magazines, television news programs, the
Internet and other media, for example, generally perform work involving
originality and talent. Radio announcers and television announcers also
perform work that requires artistic or creative talent. Exempt work
includes conducting interviews, reporting or analyzing public events,
and acting as a narrator, announcer or commentator. Positions that
primarily require the employee to collect and record routine facts or
data without analysis, interpretation, synthesis, or creative or
original writing would not qualify for the creative professional
exemption.
Sec. 541.303 Teachers.
(a) The term ``employee employed in a bona fide professional
capacity'' in section 13(a)(1) of the Act also means any employee with
a primary duty of teaching, tutoring, instructing or lecturing in the
activity of imparting knowledge and who is employed and engaged in this
activity as a teacher in an educational establishment by which the
employee is employed. The term ``educational establishment'' is defined
in Sec. 541.205(b).
(b) Exempt teachers include, but are not limited to: regular
academic teachers; teachers of kindergarten or nursery school pupils;
teachers of gifted or disabled children; teachers of skilled and
semiskilled trades and occupations; teachers engaged in automobile
driving instruction; aircraft flight instructors; home economics
teachers; and vocal or instrumental music instructors. Those faculty
members who are engaged as teachers but also spend a considerable
amount of their time in extracurricular activities such as coaching
athletic teams or acting as moderators or advisors in such areas as
drama, speech, debate or journalism are engaged in teaching. Such
activities are a recognized part of the schools' responsibility in
contributing to the educational development of the student.
(c) The possession of an elementary or secondary teacher's
certificate provides a clear means of identifying the individuals
contemplated as being within the scope of the exemption for teaching
professionals. Teachers who possess a teaching certificate qualify for
the exemption regardless of the terminology (e.g., permanent,
conditional, standard, provisional, temporary, emergency, or unlimited)
used by the State to refer to different kinds of certificates. However,
private schools and public schools are not uniform in requiring a
certificate for employment as an elementary or secondary school
teacher, and a teacher's certificate is not generally necessary for
employment in institutions of higher education or other educational
establishments. Therefore, a teacher who is not certified may be
considered for exemption, provided that such individual is employed as
a teacher by the employing school or school system.
(d) The requirements of Sec. 541.300 and subpart G (salary
requirements) of this part do not apply to the teaching professionals
described in this section.
Sec. 541.304 Practice of law or medicine.
(a) The term ``employee employed in a bona fide professional
capacity'' in section 13(a)(1) of the Act also shall mean:
(1) Any employee who is the holder of a valid license or
certificate permitting the practice of law or medicine or any of their
branches and is actually engaged in the practice thereof; and
(2) Any employee who is the holder of the requisite academic degree
for the general practice of medicine and is engaged in an internship or
resident program pursuant to the practice of the profession.
(b) In the case of medicine, the exemption applies to physicians
and other practitioners licensed and practicing in the field of medical
science and healing or any of the medical specialties practiced by
physicians or practitioners. The term ``physicians'' includes medical
doctors including general practitioners and specialists, osteopathic
physicians (doctors of osteopathy), podiatrists, dentists (doctors of
dental medicine), and optometrists (doctors of optometry or bachelors
of science in optometry).
(c) Employees engaged in internship or resident programs, whether
or not licensed to practice prior to commencement of the program,
qualify as exempt professionals if they enter such internship or
resident programs after the earning of the appropriate degree required
for the general practice of their profession.
(d) The requirements of Sec. 541.300 and subpart G (salary
requirements) of this part do not apply to the licensed lawyers and
medical professionals described in this section.
Subpart E--Computer Employees
Sec. 541.400 General rule for computer employees.
(a) Computer systems analysts, computer programmers, software
engineers or other similarly skilled workers in the computer field are
eligible for exemption as professionals under section 13(a)(1) of the
Act and under section 13(a)(17) of the Act. Employees who qualify for
this exemption are highly skilled in computer systems analysis,
programming, software engineering or similar computer functions.
Because job titles vary widely and change quickly in the computer
industry, job titles are not determinative of the applicability of this
exemption. To qualify for the computer occupations exemption, the
employee must:
(1) Be compensated on a salary or fee basis at a rate of not less
than $425 per week (or $360 per week, if employed in American Samoa by
employers other than the Federal Government), exclusive of board,
lodging or other facilities, or on an hourly basis at a rate not less
than $27.63 an hour; and
(2) Have a primary duty consisting of:
(i) The application of systems analysis techniques and procedures,
including consulting with users, to determine hardware, software or
system functional specifications;
(ii) The design, development, documentation, analysis, creation,
testing or modification of computer systems or programs, including
prototypes, based on and related to user or system design
specifications;
(iii) The design, documentation, testing, creation or modification
of computer programs related to machine operating systems; or
(iv) A combination of the aforementioned duties, the performance of
which requires the same level of skills.
[[Page 15591]]
(b) The term ``salary basis'' is defined at Sec. 541.602; ``fee
basis'' is defined at Sec. 541.605; ``board, lodging or other
facilities'' is defined at Sec. 541.606; and ``primary duty'' is
defined at Sec. 541.700.
Sec. 541.401 High level of skill and expertise.
The exemption for computer employees applies only to highly-skilled
employees who have achieved a level of proficiency in the theoretical
and practical application of highly-specialized knowledge in computer
systems analysis, programming and software engineering. This exemption
does not include trainees or employees in entry level positions
learning to become proficient in such areas or to employees in computer
occupations who have not attained a level of skill and expertise which
allows them to work generally without close supervision. The level of
expertise and skill required to qualify for this exemption is generally
attained through combinations of education, specialized training and
experience in the field. No particular academic degree is required for
this exemption, nor are there any requirements for licensure or
certification.
Sec. 541.402 Computer operation, manufacture and repair.
The exemption for employees in computer occupations does not
include employees engaged in the operation of computers or in the
manufacture, repair or maintenance of computer hardware and related
equipment. Employees whose work is highly dependent upon, or
facilitated by, the use of computers and computer software programs
(e.g., engineers, drafters and others skilled in computer-aided design
software), but who are not in computer systems analysis and programming
occupations, are also not exempt computer professionals.
Sec. 541.403 Executive and administrative computer employees.
Computer employees within the scope of this exemption, as well as
those employees not within its scope, may also have executive and
administrative duties which qualify the employees for exemption under
subpart B or subpart C of this part. For example, systems analysts and
computer programmers whose primary duties are to plan, schedule, and
coordinate activities required to develop systems to solve complex
business, scientific or engineering problems of the employer or the
employer's customers are performing work of substantial importance
related to management or general business operations and may qualify as
exempt administrative employees under Sec. 541.200. Similarly, a
senior or lead computer programmer whose primary duty is to manage and
direct the work of other programmers in a customarily recognized
department or subdivision may qualify as an exempt executive employee
under Sec. 541.100.
Subpart F--Outside Sales Employees
Sec. 541.500 General rule for outside sales employees.
(a) The term ``employee employed in the capacity of outside
salesman'' in section 13(a)(1) of the Act shall mean any employee:
(1) With a primary duty of:
(i) Making sales within the meaning of section 3(k) of the Act, or
(ii) Obtaining orders or contracts for services or for the use of
facilities for which a consideration will be paid by the client or
customer; and
(2) Who is customarily and regularly engaged away from the
employer's place or places of business in performing such primary duty.
(b) The term ``primary duty'' is defined at Sec. 541.700. In
determining the primary duty of an outside sales employee, work
performed incidental to and in conjunction with the employee's own
outside sales or solicitations, including incidental deliveries and
collections, shall be regarded as exempt outside sales work. Other work
that furthers the employee's sales efforts also shall be regarded as
exempt work including, for example, writing sales reports, updating or
revising the employee's sales or display catalog, planning itineraries
and attending sales conferences. The requirements of subpart G (salary
requirements) of this part do not apply to the outside sales employees
described in this section.
Sec. 541.501 Making sales or obtaining orders.
(a) Section 541.500 requires that the employee be engaged in:
(1) Making sales within the meaning of section 3(k) of the Act, or
(2) Obtaining orders or contracts for services or for the use of
facilities.
(b) Sales within the meaning of section 3(k) of the Act include the
transfer of title to tangible property, and in certain cases, of
tangible and valuable evidences of intangible property. Section 3(k) of
the Act states that ``sale'' or ``sell'' includes any sale, exchange,
contract to sell, consignment for sale, shipment for sale, or other
disposition.
(c) Exempt outside sales work includes not only the sales of
commodities, but also ``obtaining orders or contracts for services or
for the use of facilities for which a consideration will be paid by the
client or customer.'' Obtaining orders for ``the use of facilities''
includes the selling of time on radio or television, the solicitation
of advertising for newspapers and other periodicals, and the
solicitation of freight for railroads and other transportation
agencies.
(d) The word ``services'' extends the outside sales exemption to
employees who sell or take orders for a service, which may be performed
for the customer by someone other than the person taking the order.
Sec. 541.502 Away from employer's place of business.
(a) An outside sales employee must be customarily and regularly
engaged ``away from the employer's place or places of business.'' This
requirement is based on the obvious connotation of the word ``outside''
in the statutory term ``outside salesman.'' The Administrator does not
have authority to define this exemption for ``outside'' sales under
section 13(a)(1) of the Act as including inside sales work. Section
13(a)(1) does not exempt inside sales and other inside work (except
work performed incidental to and in conjunction with outside sales and
solicitations). However, section 7(i) of the Act exempts commissioned
inside sales employees of qualifying retail or service establishments
if those employees meet the compensation requirements of section 7(i).
(b) The outside sales employee is an employee who makes sales at
the customer's place of business or, if selling door-to-door, at the
customer's home. Outside sales does not include sales made by mail,
telephone or the Internet unless such contact is used merely as an
adjunct to personal calls. Thus, any fixed site, whether home or
office, used by a salesperson as a headquarters or for telephonic
solicitation of sales is considered one of the employer's places of
business, even though the employer is not in any formal sense the owner
or tenant of the property. However, an outside sales employee does not
lose the exemption by displaying samples in hotel sample rooms during
trips from city to city; these sample rooms should not be considered as
the employer's places of business.
Sec. 541.503 Promotion work.
(a) Promotion work is one type of activity often performed by
persons who make sales, which may or may not be exempt outside sales
work, depending upon the circumstances under which it is performed.
Promotional work that is actually performed incidental to and in
[[Page 15592]]
conjunction with an employee's own outside sales or solicitations is
exempt work. On the other hand, promotional work that is incidental to
sales made, or to be made, by someone else is not exempt outside sales
work.
(b) A manufacturer's representative, for example, may perform
various types of promotional activities such as putting up displays and
posters, removing damaged or spoiled stock from the merchant's shelves
or rearranging the merchandise. Such an employee can be considered an
exempt outside sales employee if the employee's primary duty is making
sales or contracts. Promotion activities directed toward consummation
of the employee's own sales are exempt. Promotional activities designed
to stimulate sales that will be made by someone else are not exempt.
(c) Another example is a company representative who visits chain
stores, arranges the merchandise on shelves, replenishes stock by
replacing old with new merchandise, consults with the store manager as
to the requirements of the store, fills out a requisition for the
quantity wanted, but leaves the requisition with the store manager to
be transmitted to the central warehouse of the chain store company
which later ships the quantity requested. The arrangement of
merchandise on the shelves or the replenishing of stock is not exempt
work unless it is incidental to and in conjunction with the employee's
own outside sales. Because the employee in this instance does not
consummate the sale nor direct efforts toward the consummation of a
sale, the work in this example is not exempt.
Sec. 541.504 Drivers who sell.
(a) Drivers who deliver products and also sell such products may
qualify as exempt outside sales employees only if the employee has a
primary duty of making sales. If the employee has a primary duty of
making sales, all work performed incidental to and in conjunction with
the employee's own sales efforts, including loading, driving or
delivering products, is exempt work.
(b) Several factors should be considered in determining if a driver
has a primary duty of making sales, including: a comparison of the
driver's duties with those of other employees engaged as truck drivers
and as salespersons; possession of a selling or solicitor's license
when such license is required by law or ordinances; presence or absence
of customary or contractual arrangements concerning amounts of products
to be delivered; description of the employee's occupation in collective
bargaining agreements; the employer's specifications as to
qualifications for hiring; sales training; attendance at sales
conferences; method of payment; and proportion of earnings directly
attributable to sales.
(c) Drivers who may qualify as exempt outside sales employees
include:
(1) A driver who provides the only sales contact between the
employer and the customers visited, who calls on customers and takes
orders for products, who delivers products from stock in the employee's
vehicle or procures and delivers the product to the customer on a later
trip, and who receives compensation commensurate with the volume of
products sold.
(2) A driver who obtains or solicits orders for the employer's
products from persons who have authority to commit the customer for
purchases.
(3) A driver who calls on new prospects for customers along the
employee's route and attempts to convince them of the desirability of
accepting regular delivery of goods,
(4) A driver who calls on established customers along the route and
carrying an assortment of the employer's products who persuades regular
customers to accept delivery of increased amounts of goods or of new
products, even though the initial sale or agreement for delivery was
made by someone else.
(d) Drivers who generally would not qualify as exempt outside sales
employees include:
(1) A route driver whose primary duty is to transport products sold
by the employer through vending machines and to keep such machines
stocked, in good operating condition, and in good locations does not
have a primary duty of making sales.
(2) A driver who often calls on established customers day after day
or week after week, delivering a quantity of the employer's products at
each call when the sale was not significantly affected by solicitations
of the customer by the delivering driver or the amount of the sale is
determined by the volume of the customer's sales since the previous
delivery.
(3) A driver primarily engaged in making deliveries to customers
and performing activities intended to promote sales by customers
(including placing point-of-sale and other advertising materials, price
stamping commodities, arranging merchandise on shelves, in coolers or
in cabinets, rotating stock according to date, and cleaning and
otherwise servicing display cases), unless such work is in furtherance
of the driver's own sales efforts.
Subpart G--Compensation Requirements
Sec. 541.600 Amount of salary required.
(a) To qualify as an exempt executive, administrative or
professional employee under section 13(a)(1) of the Act, an employee
must be compensated on a salary basis at a rate of not less than $425
per week (or $360 per week, if employed in American Samoa by employers
other than the Federal Government), exclusive of board, lodging or
other facilities. Administrative and professional employees may also be
paid on a fee basis, as defined in Sec. 541.605.
(b) The $425 a week may be translated into equivalent amounts for
periods longer than one week. The requirement will be met if the
employee is compensated biweekly on a salary basis of $850, semimonthly
on a salary basis of $920.84, or monthly on a salary basis of
$1,841.67. However, the shortest period of payment that will meet this
compensation requirement is one week.
(c) In the case of academic administrative employees, the
compensation requirement also may be met by compensation on a salary
basis at a rate at least equal to the entrance salary for teachers in
the educational establishment by which the employee is employed, as
provided in Sec. 541.206(a)(1).
(d) In the case of computer employees, the compensation requirement
also may be met by compensation on an hourly basis at a rate not less
than $27.63 an hour, as provided in Sec. 541.400(a).
(e) In the case of professional employees, the compensation
requirements in this section shall not apply to employees engaged as
teachers (Sec. 541.303); employees who hold a valid license or
certificate permitting the practice of law or medicine or any of their
branches and are actually engaged in the practice thereof (see Sec.
541.304); or to employees who hold the requisite academic degree for
the general practice of medicine and are engaged in an internship or
resident program pursuant to the practice of the profession (see Sec.
541.304). In the case of medical occupations, the exception from the
salary or fee requirement does not apply to pharmacists, nurses,
therapists, technologists, sanitarians, dietitians, social workers,
psychologists, psychometrists, or other professions which service the
medical profession.
Sec. 541.601 Highly compensated employees.
(a) An employee who performs office or non-manual work and is
guaranteed a total annual compensation of at least
[[Page 15593]]
$65,000 ($55,000 if employed in American Samoa by employers other than
the Federal Government) is deemed exempt under section 13(a)(1) of the
Act if the employee performs any one or more of the exempt duties or
responsibilities of an executive, administrative or professional
employee identified in subparts B, C or D of this part.
(b) The phrase ``total annual compensation'' excludes board,
lodging or other facilities as defined in Sec. 541.606, but includes
base salary, commissions, non-discretionary bonuses and other non-
discretionary compensation.
(1) The base salary, commissions and non-discretionary compensation
must be settled and paid out to the employee as due on at least a
monthly basis. Thus, for example, employees told they will receive a
commission of 1 percent of all monthly sales orders that exceed $1
million must receive any commission due each month. Of course, if sales
do not exceed $1 million in a particular month, no commission is due
for that month. Similarly, employees who are told they will receive a
$300 production bonus for each ton of product manufactured in excess of
a weekly quota must receive any bonus earned at least monthly. Again,
there may be months in which no bonus is due because production did not
exceed the quota in any week of the month.
(2) If an employee's base salary and non-discretionary compensation
do not total at least the minimum guarantee established in Sec.
541.601(a) by end of the year, the employer may, by the next pay period
after the end of the year, make a final payment sufficient to achieve
the guaranteed level. For example, an employee may earn $36,000 in
guaranteed base salary, and the employer may anticipate based upon past
sales that the employee also will earn $36,000 in commissions. However,
due to poor sales in the final quarter of the year, the employee
actually only earns $26,000 in commissions. In this situation, the
employer may by the next pay period after the end of the year make a
payment of $3,000 to the employee. If the employer fails to make such a
payment, the employee does not qualify as a highly compensated
employee, but may still qualify as exempt under subparts B, C or D of
this part.
(3) An employee who does not work a full year for the employer,
either because the employee is newly hired after the beginning of the
year or ends the employment before the end of the year, may qualify for
exemption under this section if the employee receives a pro rata
portion of the minimum guarantee established in Sec. 541.601(a), based
upon the number of weeks that the employee will be or has been
employed. The employer may utilize any 52-week period as the year, such
as a calendar year, a fiscal year, or an anniversary of hire year. If
the employer does not identify some other year period in advance, the
calendar year will apply.
(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. Thus, a highly compensated
employee may qualify for exemption if the employee performs any one or
more of the exempt duties or responsibilities of an executive,
administrative or professional employee identified in subparts B, C or
D of this part. Thus, an employee may qualify as a highly compensated
executive employee, for example, if the employee directs the work of
two or more other employees, even though the employee does not have
authority to hire and fire.
(d) This section applies only to employees performing office or
non-manual work. carpenters, electricians, mechanics, plumbers, iron
workers, craftsmen, operating engineers, longshoremen, construction
workers, teamsters and other employees who perform manual work are not
exempt under this section no matter how highly paid they might be.
Sec. 541.602 Salary basis.
(a) General rule. An employee will be considered to be paid on a
``salary basis'' within the meaning of these regulations if the
employee regularly receives each pay period on a weekly, or less
frequent basis, a predetermined amount constituting all or part of the
employee's compensation, which amount is not subject to reduction
because of variations in the quality or quantity of the work performed.
Subject to the exceptions provided in paragraph (b) of this section, an
exempt employee must receive the full salary for any week in which the
employee performs any work without regard to the number of days or
hours worked. Exempt employees need not be paid for any workweek in
which they perform no work. An employee is not paid on a salary basis
if deductions from the employee's predetermined compensation are made
for absences occasioned by the employer or by the operating
requirements of the business. If the employee is ready, willing and
able to work, deductions may not be made for time when work is not
available.
(b) Exceptions. The prohibition against deductions from pay in the
salary basis requirement is subject to the following exceptions:
(1) Deductions from pay may be made when an exempt employee is
absent from work for a full day for personal reasons, other than
sickness or disability. Thus, if an employee is absent for two full
days to handle personal affairs, the employee's salaried status will
not be affected if deductions are made from the salary for two full-day
absences. However, if an exempt employee is absent for one and a half
days for personal reasons, the employer can deduct only for the one
full-day absence.
(2) Deductions from pay may be made for absences of a full day or
more occasioned by sickness or disability (including work-related
accidents) if the deduction is made in accordance with a bona fide
plan, policy or practice of providing compensation for loss of salary
occasioned by such sickness or disability. The employer is not required
to pay any portion of the employee's salary for full day absences for
which the employee receives compensation under the plan, policy or
practice. Deductions for such full day absences also may be made before
the employee has qualified under the plan, policy or practice, and
after the employee has exhausted the leave allowance thereunder. Thus,
for example, if an employer maintains a short-term disability insurance
plan providing salary replacement for 12 weeks starting on the fourth
day of absence, the employer may make deductions from pay for the three
days of absence before the employee qualifies for benefits under the
plan; for the twelve weeks in which the employee receives salary
replacement benefits under the plan; and for absences after the
employee has exhausted the 12 weeks of salary replacement benefits.
Similarly, an employer may make deductions from pay for absences of a
full day or more if salary replacement benefits are provided under a
State disability insurance law or under a State workers' compensation
law.
(3) While an employer cannot make deductions from pay for absences
of an exempt employee occasioned by jury duty, attendance as a witness
or temporary military leave, the employer can offset any amounts
received by an employee as jury fees, witness fees or military pay for
a particular week against the salary due for that particular week
without loss of the exemption.
(4) Deductions from pay of exempt employees may be made for
penalties imposed in good faith for infractions of
[[Page 15594]]
safety rules of major significance. Safety rules of major significance
include those relating to the prevention of serious danger in the
workplace or to other employees, such as rules prohibiting smoking in
explosive plants, oil refineries and coal mines.
(5) Deductions from pay of exempt employees may be made for unpaid
disciplinary suspensions of a full day or more imposed in good faith
for infractions of workplace conduct rules. Such suspensions must be
imposed pursuant to a written policy applied uniformly to all workers.
Thus, for example, an employer may suspend an exempt employee without
pay for three days for violating a uniformly applied written policy
prohibiting sexual harassment. Similarly, an employer may suspend an
exempt employee without pay for twelve days for violating a uniformly
applied written policy prohibiting workplace violence.
(6) An employer is not required to pay the full salary in the
initial or terminal week of employment. Rather, an employer may pay a
proportionate part of an employee's full salary for the time actually
worked in the first and last week of employment. In such weeks, the
payment of an hourly or daily equivalent of the employee's full salary
for the time actually worked will meet the requirement. However,
employees are not paid on a salary basis within the meaning of these
regulations if they are employed occasionally for a few days, and the
employer pays them a proportionate part of the weekly salary when so
employed.
(7) An employer is not required to pay the full salary for weeks in
which an exempt employee takes unpaid leave under the Family and
Medical Leave Act. Rather, when an exempt employee takes unpaid leave
under the Family and Medical Leave Act, an employer may pay a
proportionate part of the full salary for time actually worked. For
example, if an employee who normally works forty hours per week uses
four hours of unpaid leave under the Family and Medical Leave Act, the
employer could deduct 10% of the employee's normal salary that week.
(c) When calculating the amount of a deduction from pay allowed
under paragraph (b) of this section, the employer may use the hourly or
daily equivalent of the employee's full weekly salary or any other
amount proportional to the time actually missed by the employee. A
deduction from pay as a penalty for violations of major safety rules
under paragraph (b)(4) of this section may be made in any amount.
Sec. 541.603 Effect of improper deductions from salary.
(a) An employer who makes improper deductions from salary shall
lose the exemption if the facts demonstrate that the employer has a
pattern and practice of not paying employees on a salary basis. A
pattern and practice of making improper deductions demonstrates that
the employer did not intend to pay employees in the job classification
on a salary basis. Improper deductions that are isolated or
inadvertent, however, will not result in loss of the exemption. The
factors to consider when determining whether an employer has a pattern
and practice of not paying employees on a salary basis include, but are
not limited to: The number of improper deductions; the time period
during which the employer made improper deductions; the number and
geographic location of employees whose salary was improperly reduced;
the number and geographic location of managers responsible for taking
the improper deductions; the size of the employer; whether the employer
has a written policy prohibiting improper deductions; and whether the
employer corrected the improper pay deductions.
(b) If the facts demonstrate that the employer has a policy of not
paying on a salary basis, the exemption is lost during the time period
in which improper deductions were made for employees in the same job
classification working for the same managers responsible for the
improper deductions. Employees in different job classifications who
work for different managers do not lose their status as exempt
employees. Thus, for example, if a manager at a company facility
routinely docks the pay of engineers at that facility for partial-day
personal absences, then all engineers at that facility whose pay could
have been improperly docked by the manager would lose the exemption;
engineers at other facilities or working for other managers, however,
would remain exempt.
(c) If an employer has a written policy prohibiting improper pay
deductions as provided in Sec. 541.602, notifies employees of that
policy and reimburses employees for any improper deductions, such
employer will not lose the exemption for any employees unless the
employer repeatedly and willfully violates the policy or continues to
make improper deductions after receiving employee complaints. Examples
of notification include publishing the policy to employees at the time
of hire, in an employee handbook or on the employer's Intranet.
(d) This section shall not be construed in an unduly technical
manner so as to defeat the exemption.
Sec. 541.604 Minimum guarantees plus extras.
(a) An exempt employee may receive additional compensation,
consistent with the exemption and the salary basis requirement, if the
employment arrangement also includes a guarantee of at least the
minimum weekly-required amount paid on a salary basis. Thus, for
example, an exempt employee guaranteed at least $425 each week paid on
a salary basis may also receive additional compensation of a one
percent commission on sales. An exempt employee also may receive a
percentage of the sales or profits of the employer if the employment
arrangement also includes a guarantee of at least $425 each week paid
on a salary basis. Similarly, the exemption is not lost if an exempt
employee who is guaranteed at least $425 each week paid on a salary
basis also receives additional compensation based on hours worked. Such
additional compensation may be paid on any basis (e.g. flat sum, bonus
payment, straight-time hourly amount, time and one-half or any other
basis).
(b) An exempt employee's salary may be computed on an hourly, a
daily or a shift basis, consistent with the exemption and the salary
basis requirement, if the employment arrangement also includes a
guarantee of at least the minimum weekly required amount paid on a
salary basis regardless of the number of hours, days or shifts worked
and a reasonable relationship exists between the guaranteed amount and
the amount actually earned. The reasonable relationship test will be
met if the weekly guarantee is roughly equivalent to the employee's
usual earnings at the assigned hourly, daily or shift rate for the
employee's normal scheduled workweek. Thus, for example, an exempt
employee guaranteed compensation of at least $500 for any week in which
the employee performs any work, and who normally works four or five
shifts each week, may be paid $150 per shift consistent with the salary
basis requirement.
Sec. 541.605 Fee basis.
(a) Administrative and professional employees may be paid on a fee
basis, rather than on a salary basis. An employee will be considered to
be paid on a ``fee basis'' within the meaning of these regulations if
the employee is paid an agreed sum for a single job regardless of the
time required for its completion. These payments in a sense resemble
[[Page 15595]]
piecework payments with the important distinction that generally a
``fee'' is paid for the kind of job that is unique rather than for a
series of jobs repeated an indefinite number of times and for which
payment on an identical basis is made over and over again. Payments
based on the number of hours or days worked and not on the
accomplishment of a given single task are not considered payments on a
fee basis.
(b) To determine whether the fee payment meets the minimum amount
of salary required for exemption under these regulations, the amount
paid to the employee will be tested by determining the time worked on
the job and whether the fee payment is at a rate that would amount to
at least $425 per week if the employee worked 40 hours. Thus, an artist
paid $250 for a picture that took 20 hours to complete meets the
minimum salary requirement for exemption since earnings at this rate
would yield the artist $500 if 40 hours were worked.
Sec. 541.606 Board, lodging or other facilities.
(a) To qualify for exemption under section 13(a)(1) of the Act, an
employee must earn the minimum salary amount set forth in Sec.
541.600, ``exclusive of board, lodging or other facilities.'' The
phrase ``exclusive of board, lodging or other facilities'' means ``free
and clear'' or independent of any claimed credit for non-cash items of
value that an employer may provide to an employee. Thus, the costs
incurred by an employer to provide an employee with board, lodging or
other facilities may not count towards the minimum salary amount
required for exemption under this part 541. Such separate transactions
are not prohibited between employers and their exempt employees, but
the costs to employers associated with such transactions may not be
considered when determining if an employee has received the full
required minimum salary payment.
(b) Regulations defining what constitutes ``board, lodging, or
other facilities'' are contained in 29 CFR part 531. As described in 29
CFR 531.32, the term ``other facilities'' refers to items similar to
board and lodging, such as meals furnished at company restaurants or
cafeterias or by hospitals, hotels, or restaurants to their employees;
meals, dormitory rooms, and tuition furnished by a college to its
student employees; merchandise furnished at company stores or
commissaries, including articles of food, clothing, and household
effects; housing furnished for dwelling purposes; and transportation
furnished to employees for ordinary commuting between their homes and
work.
Subpart H--Definitions and Miscellaneous Provisions
Sec. 541.700 Primary duty.
To qualify for exemption under this part, an employee must have a
``primary duty'' of performing exempt work. The term ``primary duty''
means the principal, main, major or most important duty that the
employee performs. Determination of an employee's primary duty must be
based on all the facts in a particular case. Factors to consider when
determining the primary duty of an employee include, but are not
limited to the relative importance of the exempt duties as compared
with other types of duties; the amount of time spent performing exempt
work; the employee's relative freedom from direct supervision; and the
relationship between the employee's salary and the wages paid to other
employees for the same kind of nonexempt work. The term ``primary
duty'' does not require that employees spend over fifty percent of
their time performing exempt work. Thus, for example, an assistant
manager in a retail establishment who performs exempt work such as
supervising and directing the work of other employees, ordering
merchandise, handling customer complaints and authorizing payment of
bills may have management as the primary duty, even if the assistant
manager spends more than fifty percent of the time performing non-
exempt work such as running the cash register. However, the amount of
time spent performing exempt work can be a useful guide, and employees
who spend over fifty percent of the time performing exempt work will be
considered to have a primary duty of performing exempt work. The fact
that an employer has well-defined operating policies or procedures
should not by itself defeat an employee's exempt status.
Sec. 541.701 Customarily and regularly.
The phrase ``customarily and regularly'' means a frequency that
must be greater than occasional but which, of course, may be less than
constant. Tasks or work performed ``customarily and regularly''
includes work normally and recurrently performed every work week; it
does not included isolated or one-time tasks.
Sec. 541.702 Exempt and nonexempt work.
The term ``exempt work'' means all work described in Sec. Sec.
541.100, 541.101, 541.102, 541.200, 541.206, 541.300, 541.301, 541.302,
541.303, 541.304, 541.400 and 541.500, and the activities directly and
closely related to such work. All other work is considered
``nonexempt.''
Sec. 541.703 Directly and closely related.
(a) Work that is ``directly and closely related'' to the
performance of exempt work is also considered exempt work. The phrase
``directly and closely related'' means tasks that are related to exempt
duties and that contribute to or facilitate performance of exempt work.
Thus, ``directly and closely related'' work may include physical tasks
and menial tasks that arise out of exempt duties, and the routine work
without which the exempt employee's more important work cannot be
performed properly. Work ``directly and closely related'' to the
performance of exempt duties may also include recordkeeping; monitoring
and adjusting machinery; taking notes; using the computer to create
documents or presentations; opening the mail for the purpose of reading
it and making decisions; and using a photocopier or fax machine. Work
is not ``directly and closely related'' if the work is remotely related
or completely unrelated to exempt duties.
(b) The following examples further illustrate the type of work that
is and is not normally considered as directly and closely related to
exempt work:
(1) Keeping time, production or sales records for subordinates is
work directly and closely related to an exempt executive's function of
managing a department and supervising employees.
(2) The distribution of materials, merchandise or supplies to
maintain control of the flow of and expenditures for such items is
directly and closely related to the performance of exempt duties.
(3) A supervisor who spot checks and examines the work of
subordinates to determine whether they are performing their duties
properly, and whether the product is satisfactory, is performing work
which is directly and closely related to managerial and supervisory
functions, so long as the checking is distinguishable from the work
ordinarily performed by a nonexempt inspector.
(4) A supervisor who sets up a machine may be engaged in exempt
work, depending upon the nature of the industry and the operation. In
some cases the setup work, or adjustment of the machine for a
particular job, is typically performed by the same employees who
operate the machine. Such setup work is part of the production
operation and is not exempt. In other cases, the setting up of the work
is a highly skilled operation which the ordinary production worker or
machine
[[Page 15596]]
tender typically does not perform. In large plants, non-supervisors may
perform such work. However, particularly in small plants, such work is
a regular duty of the executive and is directly and closely related to
the executive's responsibility for the work performance of subordinates
and for the adequacy of the final product. Under such circumstances, it
is exempt work.
(5) A department manager in a retail or service establishment who
walks about the sales floor observing the work of sales personnel under
the employee's supervision to determine the effectiveness of their
sales techniques, checks on the quality of customer service being
given, or observes customer preferences is performing work which is
directly and closely related to managerial and supervisory functions.
(6) A business consultant may take extensive notes recording the
flow of work and materials through the office or plant of the client;
after returning to the office of the employer, the consultant may
personally use the computer to type a report and create a proposed
table of organization. Standing alone, or separated from the primary
duty, such note taking and typing would be routine in nature. However,
because this work is necessary for analyzing the data and making
recommendations, the work is directly and closely related to exempt
work. While it is possible to assign note taking and typing to
nonexempt employees, and in fact it is frequently the practice to do
so, delegating such routine tasks is not required as a condition of
exemption.
(7) A credit manager who makes and administers the credit policy of
the employer, establishes credit limits for customers, authorizes the
shipment of orders on credit, and makes decisions on whether to exceed
credit limits would be performing work exempt under Sec. 541.200. Work
that is directly and closely related to these exempt duties may include
checking the status of accounts to determine whether the credit limit
would be exceeded by the shipment of a new order, removing credit
reports from the files for analysis, and writing letters giving credit
data and experience to other employers or credit agencies.
(8) A traffic manager in charge of planning a company's
transportation, including the most economical and quickest routes for
shipping merchandise to and from the plant, contracting for common-
carrier and other transportation facilities, negotiating with carriers
for adjustments for damages to merchandise, and making the necessary
rearrangements resulting from delays, damages or irregularities in
transit is performing exempt work. If the employee also spends part of
the day taking telephone orders for local deliveries, such order-taking
is a routine function and is not directly and closely related to the
exempt work.
(9) An example of work directly and closely related to exempt
professional duties is a chemist performing menial tasks such as
cleaning a test tube in the middle of an original experiment, even
though such menial tasks can be assigned to laboratory assistants.
(10) A teacher performs work directly and closely related to exempt
duties when, while taking students on a field trip, the teacher drives
a school van or monitors the students' behavior in a restaurant.
Sec. 541.704 Trainees.
The executive, administrative, professional, outside sales and
computer employee exemptions do not apply to employees training for
employment in an executive, administrative, professional, outside sales
or computer employee capacity who are not actually performing the
duties of an executive, administrative, professional, outside sales or
computer employee.
Sec. 541.705 Emergencies.
(a) An exempt employee will not lose the exemption by performing
work of a normally nonexempt nature because of the existence of an
emergency. Thus, when emergencies arise that threaten the safety of
employees, a cessation of operations or serious damage to the
employer's property, any work performed in an effort to prevent such
results is considered exempt work.
(b) An ``emergency'' does not include occurrences that are not
beyond control or for which the employer can reasonably provide in the
normal course of business. Emergencies generally occur only rarely, and
are events that the employer cannot reasonably anticipate.
(c) The following examples illustrate the distinction between
emergency work considered exempt work and routine work that is not
exempt work:
(1) A mine superintendent who pitches in after an explosion and
digs out workers who are trapped in the mine is still a bona fide
executive.
(2) Assisting nonexempt employees with their work during periods of
heavy workload or to handle rush orders is not exempt work.
(3) Replacing a nonexempt employee during the first day or partial
day of an illness may be considered exempt emergency work depending on
factors such as the size of the establishment and of the executive's
department, the nature of the industry, the consequences that would
flow from the failure to replace the ailing employee immediately, and
the feasibility of filling the employee's place promptly.
(4) Regular repair and cleaning of equipment is not emergency work,
even when necessary to prevent fire or explosion; however, repairing
equipment may be emergency work if the breakdown of or damage to the
equipment was caused by accident or carelessness that the employer
could not reasonably anticipate.
Sec. 541.706 Occasional tasks.
Occasional, infrequently recurring tasks that cannot practicably be
performed by nonexempt employees, but are the means for an exempt
employee to properly carry out exempt functions and responsibilities,
are considered exempt work. The following factors should be considered
in determining whether such work is exempt work: whether the same work
is performed by any of the executive's subordinates; practicability of
delegating the work to a nonexempt employee; whether the executive
performs the task frequently or occasionally; and existence of an
industry practice for the executive to perform the task.
Sec. 541.707 Combination exemptions.
Employees who perform a combination of exempt duties as set forth
in these regulations for executive, administrative, professional,
outside sales and computer employees may qualify for exemption. Thus,
for example, an employee who works forty percent of the time performing
exempt administrative duties and another forty percent of the time
performing exempt executive duties may qualify for exemption. In other
words, work that is exempt under one section of this part will not
defeat the exemption under any other section.
Sec. 541.708 Motion picture producing industry.
The requirement that the employee be paid ``on a salary basis''
does not apply to an employee in the motion picture producing industry
who is compensated at a base rate of at least $650 a week (exclusive of
board, lodging, or other facilities). Thus, an employee in this
industry who is otherwise exempt under subparts B, C and D of this
part, and who is employed at a base rate of at least $650 a week is
exempt if paid a proportionate amount (based on a week
[[Page 15597]]
of not more than 6 days) for any week in which the employee does not
work a full workweek for any reason. Moreover, an otherwise exempt
employee in this industry qualifies for exemption if the employee is
employed at a daily rate under the following circumstances:
(a) The employee is in a job category for which a weekly base rate
is not provided and the daily base rate would yield at least $650 if 6
days were worked; or
(b) The employee is in a job category having a weekly base rate of
at least $650 and the daily base rate is at least one-sixth of such
weekly base rate.
Sec. 541.709 Employees of public agencies.
(a) An employee of a public agency who otherwise meets the salary
basis requirements of Sec. 541.602 shall not be disqualified from
exemption under Sec. Sec. 541.100, 541.200, 541.300 or 541.400 on the
basis that such employee is paid according to a pay system established
by statute, ordinance or regulation, or by a policy or practice
established pursuant to principles of public accountability, under
which the employee accrues personal leave and sick leave and which
requires the public agency employee's pay to be reduced or such
employee to be placed on leave without pay for absences for personal
reasons or because of illness or injury of less than one work-day when
accrued leave is not used by an employee because:
(1) Permission for its use has not been sought or has been sought
and denied;
(2) Accrued leave has been exhausted; or
(3) The employee chooses to use leave without pay.
(b) Deductions from the pay of an employee of a public agency for
absences due to a budget-required furlough shall not disqualify the
employee from being paid on a salary basis except in the workweek in
which the furlough occurs and for which the employee's pay is
accordingly reduced.
[FR Doc. 03-7449 Filed 3-28-03; 8:45 am]
BILLING CODE 4510-27-P