[Federal Register Volume 73, Number 145 (Monday, July 28, 2008)]
[Proposed Rules]
[Pages 43654-43673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-16631]


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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 4, 531, 553, 778, 779, 780, 785, 786, and 790

RIN 1215-AB13


Updating Regulations Issued Under the Fair Labor Standards Act

AGENCY: Wage and Hour Division, Employment Standards Administration, 
Department of Labor.

ACTION: Notice of proposed rulemaking and request for comments.

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SUMMARY: In this proposed rule, the Department of Labor (Department or 
DOL) proposes to revise regulations issued pursuant to the Fair Labor 
Standards Act of 1938 (FLSA) and the Portal-to-Portal Act of 1947 
(Portal Act) that have become out of date because of subsequent 
legislation or court decisions. These proposed revisions will conform 
the regulations to FLSA amendments passed in 1974, 1977, 1996, 1997, 
1998, 1999, 2000, and 2007, and Portal Act amendments passed in 1996.

DATES: Comments must be received on or before September 11, 2008.

ADDRESSES: You may submit comments, identified by RIN 1215-AB13, by 
either one of the following methods:
     Electronic comments, through the federal eRulemaking 
Portal: http://

[[Page 43655]]

www.regulations.gov. Follow the instructions for submitting comments.
     Mail: Wage and Hour Division, Employment Standards 
Administration, U.S. Department of Labor, Room S-3502, 200 Constitution 
Avenue, NW., Washington, DC 20210.
    Instructions: Please submit one copy of your comments by only one 
method. All submissions received must include the agency name and 
Regulatory Information Number (RIN) identified above for this 
rulemaking. Comments received will be posted to http://www.regulations.gov, including any personal information provided. 
Because we continue to experience delays in receiving mail in the 
Washington, DC area, commenters are strongly encouraged to transmit 
their comments electronically via the federal eRulemaking Portal at 
http://www.regulations.gov or to submit them by mail early. For 
additional information on submitting comments and the rulemaking 
process, see the ``Public Participation'' heading of the SUPPLEMENTARY 
INFORMATION section of this document.
    Docket: For access to the docket to read background documents or 
comments received, go to the federal eRulemaking Portal at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Richard M. Brennan, Director, Office 
of Interpretations and Regulatory Analysis, Wage and Hour Division, 
Employment Standards Administration, U.S. Department of Labor, Room S-
3506, 200 Constitution Avenue, NW., Washington, DC 20210; telephone: 
(202) 693-0051 (this is not a toll-free number). Copies of this notice 
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 (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 (WHD) District Office. Locate the 
nearest office by calling our toll-free help line at (866) 4USWAGE 
((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or 
log onto the WHD'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. Electronic Access and Filing Comments

    Public Participation: This notice is available through the Federal 
Register and the http://www.regulations.gov Web site. You may also 
access this notice via the WHD home page at http://www.dol.gov/esa/whd/regulations/FLSA2008.htm. To comment electronically on federal 
rulemakings, go to the federal eRulemaking Portal at http://www.regulations.gov, which will allow you to find, review, and submit 
comments on federal documents that are open for comment and published 
in the Federal Register. Please identify all comments submitted in 
electronic form by the RIN docket number (1215-AB13). Because of delays 
in receiving mail in the Washington, DC area, commenters should 
transmit their comments electronically via the federal eRulemaking 
Portal at http://www.regulations.gov, or submit them by mail early to 
ensure timely receipt prior to the close of the comment period. Submit 
one copy of your comments by only one method.

II. Request for Comment

    The Department requests comments on all issues related to this 
notice of proposed rulemaking. This proposed rule, if implemented as a 
final rule, will enhance the Department's enforcement of, and the 
public's understanding of, compliance obligations under the FLSA by 
replacing out of date regulations. The changes will not result in 
additional compliance costs for regulated entities. Updating the 
existing outdated regulatory provisions to reflect current law may 
result in cost savings through the avoidance of inadvertent violations 
and the costs of corrective compliance measures to remedy them.

III. Discussion of Changes

    The FLSA requires covered employers to pay their nonexempt 
employees a federal minimum wage and overtime premium pay of time and 
one-half the regular rate of pay for hours worked in excess of forty 
(40) in a work week. The FLSA also contains a number of exemptions from 
the minimum wage and overtime pay requirements.
    Over the years, Congress has amended the FLSA to refine or to add 
to these exemptions and to clarify the minimum wage and overtime pay 
requirements. As part of the U.S. Troop Readiness, Veterans' Care, 
Katrina Recovery, and Iraq Accountability Appropriations Act, 2007, 
Public Law 110-28 (May 25, 2007), Congress increased the FLSA minimum 
wage in three steps: to $5.85 per hour effective July 24, 2007; to 
$6.55 per hour effective July 24, 2008; and to $7.25 per hour effective 
July 24, 2009. As part of the Small Business Job Protection Act of 
1996, Congress amended section 4(a) of the Portal Act, 29 U.S.C. 
254(a), to define circumstances under which pay is not required for 
employees who use their employer's vehicle for home-to-work commuting 
purposes. The 1996 Act also created a youth opportunity wage at $4.25 
per hour under section 6(g) of the FLSA, 29 U.S.C. 206(g). In 1997, 
Congress amended section 13(b)(12) of the FLSA, 29 U.S.C. 213(b)(12), 
to expand the exemption from overtime pay for workers on ditches, 
canals, and reservoirs where 90% (rather than 100%) of the water is 
used for agricultural purposes. In 1998, Congress added section 3(e)(5) 
to the FLSA, 29 U.S.C. 203(e)(5), to provide that the term ``employee'' 
does not include individuals who volunteer solely for humanitarian 
purposes to private non-profit food banks and who receive groceries 
from those food banks. In 1999, Congress added section 3(y) to the 
FLSA, 29 U.S.C. 203(y), to define an employee who is engaged in ``fire 
protection activities.'' In 2000, Congress added section 7(e)(8) to the 
FLSA, 29 U.S.C. 207(e)(8), to treat stock options meeting certain 
criteria as an additional type of remuneration that is excludable from 
the computation of the regular rate. A 1974 amendment to section 
13(b)(10)(B) of the FLSA, 29 U.S.C. 213(b)(10)(B), extended an overtime 
exemption to include any salesman primarily engaged in selling boats 
and eliminated the overtime exemption previously in subsection (B) for 
partsmen and mechanics servicing trailers or aircraft. In addition, 
several appellate courts interpret the overtime exemption for ``any 
salesman, partsman, or mechanic primarily engaged in selling and 
servicing automobiles'' in section 13(b)(10)(A) of the FLSA, 29 U.S.C. 
213(b)(10)(A), as including service advisors.
    A number of courts have examined the proper interpretation of the 
FLSA's compensatory time provisions in section 7(o)(5) concerning 
public agency employers' obligation to grant employees' requests to use 
``comp time'' within a ``reasonable period after making the request if 
the use of the compensatory time does not unduly disrupt the operations 
of the public agency.'' 29 U.S.C. 207(o)(5). Finally, the regulations 
governing the ``fluctuating workweek'' method of computing half-time 
overtime pay for salaried nonexempt employees who work variable or 
fluctuating hours from

[[Page 43656]]

week to week are in need of clarification and updating to delete 
outmoded examples and eliminate confusion over the effect of paying 
bonus supplements and premium payments to affected employees.
    As discussed in more detail below, as a result of these amendments 
and court decisions, this proposed rule revises a number of out-of-date 
regulations issued under the FLSA and the Portal Act.

1. 2007 Amendment to the FLSA Minimum Wage

    On May 25, 2007, President Bush signed into law the U.S. Troop 
Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability 
Appropriations Act, 2007 (Pub. L. 110-28). As part of that legislation, 
Congress amended the FLSA by increasing the applicable federal minimum 
wage under section 6(a) of the FLSA in three steps: to $5.85 per hour 
effective July 24, 2007; to $6.55 per hour effective July 24, 2008; and 
to $7.25 per hour effective July 24, 2009.
    This legislation did not change the definition of ``wage'' in 
section 3(m) of the FLSA for purposes of applying the tip credit 
formula in determining the wage paid to a qualifying tipped employee. 
Thus, the minimum required cash wage for a tipped employee under the 
FLSA remains $2.13 per hour. The maximum allowable tip credit for 
federal purposes under the FLSA increases as a result of the 2007 
legislation, and is determined by subtracting $2.13 from the applicable 
minimum wage provided by section 6(a)(1) of the FLSA. See 29 U.S.C. 
203(m).
    Changes are proposed in several of the FLSA's implementing 
regulations that cite to the applicable minimum wage to reflect these 
statutory changes, including at 29 CFR 531.36, 531.37, 778.110, 
778.111, 778.113, and 778.114. Additional revisions to the McNamara-
O'Hara Service Contract Act regulations eliminate outdated references 
to the FLSA minimum wage in 29 CFR 4.159 and 4.167.

2. Small Business Job Protection Act of 1996

    On August 20, 1996, Congress enacted the Small Business Job 
Protection Act of 1996 (SBJPA), Public Law No. 104-188, 100 Stat. 1755. 
SBJPA amended the Portal Act to define circumstances under which pay is 
not required for employees who use their employer's vehicle for home-
to-work commuting purposes and also amended the FLSA by creating a 
youth opportunity wage and modifying the allowable tip credit.
A. Employee Commuting Flexibility Act of 1996
    Sections 2101 through 2103 of Title II of SBJPA, entitled the 
``Employee Commuting Flexibility Act of 1996,'' amended section 4(a) of 
the Portal Act, 29 U.S.C. 254(a). The amendment, effective upon 
enactment, provides that

    The use of an employer's vehicle for travel by an employee and 
activities performed by an employee which are incidental to the use 
of such vehicle for commuting shall not be considered part of the 
employee's principal activities if the use of such vehicle for 
travel is within the normal commuting area for the employer's 
business or establishment and the use of the employer's vehicle is 
subject to an agreement on the part of the employer and the employee 
or representative of such employee.

    Employee Commuting Flexibility Act of 1996, Section 2102, 29 U.S.C. 
254(a).
    The House Committee Report states that the purpose of the amendment 
is to clarify how the Portal Act applies to ``employee use of employer-
provided vehicles for commuting at the beginning and end of the 
workday.'' H.R. Rep. No. 104-585, at 6 (1996). It states that such 
travel time is to be considered noncompensable if the use of the 
vehicle is ``conducted under an agreement between the employer and the 
employee or the employee's representative.'' Id. The agreement may be a 
formal written agreement, a collective bargaining agreement, or an 
understanding based on established industry or company practices. Id. 
In addition, ``the work sites must be located within the normal 
commuting area of the employer's establishment.'' Id. at 4-5. 
Activities that are merely incidental to the use of the vehicle for 
commuting at the start or end of the day are similarly noncompensable, 
such as communication between the employee and employer to obtain 
assignments or instructions, or to report work progress or completion. 
Id. at 5.
    This statutory amendment to the Portal Act affects certain 
regulations in 29 CFR parts 785 and 790 issued pursuant to the FLSA and 
the Portal Act. Current section 785.9(a) explains the statutory 
provisions that eliminate from working time certain ``preliminary'' and 
``postliminary'' activities performed prior to or subsequent to the 
workday. To incorporate this amendment, this proposed rule adds to that 
section the new provision that activities that are incidental to the 
use of an employer-provided vehicle for commuting are not considered 
principal activities, and are not compensable, when they meet the 
conditions of the amendment. Current Sec.  785.34 discusses the effect 
of section 4 of the Portal Act on determining whether time spent in 
travel is working time. This proposed rule adds a reference to the 
statutory conditions under which commuting in an employer-provided 
vehicle will not be considered part of the employee's principal 
activities and will not be compensable. The proposed rule also revises 
Sec. Sec.  785.50 and 790.3 to incorporate the 1996 amendment into the 
quotation of section 4 of the Portal Act.
B. Youth Opportunity Wage
    Section 2105 of the SBJPA amended the FLSA by adding section 6(g), 
which provides that ``[a]ny employer may pay any employee of such 
employer, during the first 90 consecutive calendar days after such 
employee is initially employed by such employer, a wage which is not 
less than $4.25 an hour.'' 29 U.S.C. 206(g)(1). This subminimum wage 
``shall only apply to an employee who has not attained the age of 20 
years.'' 29 U.S.C. 206(g)(4). The amendment also protects current 
workers by prohibiting employers from taking action to displace 
employees, including reducing hours, wages, or employment benefits, for 
the purpose of hiring workers at the opportunity wage. It also states 
that any employer violating this subsection shall be considered to have 
violated the anti-discrimination provisions of section 15(a)(3) of the 
FLSA. 29 U.S.C. 206(g)(3).
    In this proposed rule, the Department adds a new subpart G to 29 
CFR part 786--which will be renamed Miscellaneous Exemptions and 
Exclusions From Coverage--to set forth the provisions of this new youth 
opportunity wage.
C. Minimum Wage Increase Act of 1996
    Section 2105 of Title II of the SBJPA, entitled the ``Minimum Wage 
Increase Act of 1996,'' amended section 3(m) of the FLSA, 29 U.S.C. 
203(m), by providing that

    In determining the wage an employer is required to pay a tipped 
employee, the amount paid such employee by the employee's employer 
shall be an amount equal to--
    (1) The cash wage paid such employee which for purposes of such 
determination shall be not less than the cash wage required to be 
paid such an employee on the date of the enactment of this 
paragraph; and
    (2) An additional amount on account of the tips received by such 
employee which amount is equal to the difference between the wage 
specified in paragraph (1) and the wage in effect under section 
6(a)(1).
    The additional amount on account of tips may not exceed the 
value of the tips actually received by an employee. The preceding 2

[[Page 43657]]

sentences shall not apply with respect to any tipped employee unless 
such employee has been informed by the employer of the provisions of 
this subsection, and all tips received by such employee have been 
retained by the employee, except that this subsection shall not be 
construed to prohibit the pooling of tips among employees who 
customarily and regularly receive tips.

Public Law No. 104-188, Sec.  2105(b) (1996). Prior to the 1996 
amendments, section 3(m) of the FLSA required an employer to pay its 
tipped employees a cash wage equal to 50 percent of the minimum wage 
(then $4.25 an hour). See Public Law No. 101-157, Sec.  5 (1989); 
Public Law No. 93-259, Sec.  13(e) (1974); 29 CFR 531.50. As amended, 
section 3(m)(1) provides that an employer's minimum cash wage 
obligation to its tipped employees is the minimum cash wage required on 
August 20, 1996, the date of the SBJPA enactment. Thus, section 3(m)(1) 
established an employer's cash wage obligations to tipped employees at 
the pre-SBJPA amount: 50 percent of the then-minimum wage of $4.25 per 
hour, or $2.13 per hour. See 29 U.S.C. Sec.  203(m)(1).
    Subsection (2) of the 1996 amendments bases an employer's maximum 
allowable tip credit on a specific formula in relation to the 
applicable minimum wage, stating that an employer may take a tip credit 
equal to the difference between the required minimum cash wage 
specified in paragraph 3(m)(1) ($2.13) and the minimum wage (now 
$5.85). Thus, the maximum tip credit that an employer currently is 
permitted to claim is $5.85 minus $2.13, or $3.72 per hour. (Effective 
July 24, 2008, the minimum wage required by the FLSA will increase to 
$6.55 an hour, resulting in a maximum federal tip credit limited to 
$4.42 an hour. Effective July 24, 2009, the minimum wage required by 
section 6(a)(1) of the FLSA will increase to $7.25 an hour, resulting 
in a maximum federal tip credit limited to $5.12 an hour.)
    This 1996 amendment affects certain regulations in 29 CFR part 531. 
Current Sec.  531.50(a) quotes section 3(m) of the FLSA as it appeared 
before the 1996 amendments. To incorporate the 1996 amendment, this 
proposed rule replaces the old statutory language with the current 
statutory provision. Current Sec. Sec.  531.56(d), 531.59, and 531.60 
refer to the pre-1996 statutory language setting the tip credit at 50 
percent of the minimum wage. The proposed rule deletes or changes these 
references to reflect the current statutory requirements (tip credit 
equaling the difference between the minimum wage required by section 
6(a)(1) of the FLSA and the $2.13 required cash wage). Additional 
changes related to tipped employees are discussed in this preamble at 
sections 7B and 8, infra.

3. Agricultural Workers on Water Storage/Irrigation Projects

    Section 105 of The Departments of Labor, Health, and Human 
Services, Education, and Related Agencies Appropriations Act, Public 
Law No. 105-78, 111 Stat. 1467 (Nov. 13, 1997), amended section 
13(b)(12) of the FLSA, 29 U.S.C. 213(b)(12), which provides an overtime 
exemption for agricultural employees and employees employed in 
connection with the operation or maintenance of certain waterways used 
for supply and storing of water for agricultural purposes. The 1997 
amendment deleted ``water for agricultural purposes'' and substituted 
``water, at least 90 percent of which was ultimately delivered for 
agricultural purposes during the preceding calendar year.'' Thus, this 
amendment makes the exemption from overtime pay requirements applicable 
to workers on water storage and irrigation projects where at least 90 
percent of the water is used for agricultural purposes, rather than 
where the water is used exclusively for agricultural purposes.
    In this proposed rule, the Department updates the regulations in 29 
CFR part 780, Subpart E to incorporate the statutory amendment. Thus, 
proposed Sec.  780.400 correctly quotes the statute, including the 
amendment. Section 780.401 provides an updated general explanatory 
statement of the history of the exemption. Section 780.406 deletes the 
last sentence of the current rule, which refers to the 1966 amendments, 
as no longer necessary. Finally, Sec.  780.408 is updated to describe 
the ``at least 90 percent'' requirement for using the water for 
agricultural purposes.

4. Certain Volunteers at Private Non-Profit Food Banks

    Section 1 of the Amy Somers Volunteers at Food Banks Act, Public 
Law No. 105-221, 112 Stat. 1248 (Aug. 7, 1998), amended section 3(e) of 
the FLSA, 29 U.S.C. 203(e), by adding section (5) to provide that the 
term ``employee'' does not include individuals volunteering solely for 
humanitarian purposes at private non-profit food banks and who receive 
groceries from those food banks given in recognition of such 
individual's needs and not in exchange for such individual's services. 
29 U.S.C. 203(e)(5). This proposed rule renames 29 CFR part 786 to 
``Miscellaneous Exemptions and Exclusions From Coverage'' and adds 
Subpart H to set forth this exclusion from FLSA coverage.

5. Employees Engaged in Fire Protection Activities

    In 1999, Congress amended section 3 of the FLSA, 29 U.S.C. 203, by 
adding section (y) to define ``an employee in fire protection 
activities.'' This amendment states that an ``employee in fire 
protection activities'' means

an employee, including a firefighter, paramedic, emergency medical 
technician, rescue worker, ambulance personnel, or hazardous 
material worker, who--(1) is trained in fire suppression, has the 
legal authority and responsibility to engage in fire suppression, 
and is employed by a fire department of a municipality, county, fire 
district, or State; and (2) is engaged in the prevention, control, 
and extinguishment of fires or response to emergency situations 
where life, property, or the environment is at risk.

Public Law No. 106-151, 113 Stat. 1731 (1999); 29 U.S.C. 203(y). Such 
employees may be covered by the partial overtime exemption allowed by 
Sec.  7(k) or the overtime exemption for public agencies with fewer 
than five employees in fire protection activities pursuant to Sec.  
13(b)(20). 29 U.S.C. 207(k); 213(b)(20).
    This proposed rule makes several revisions to 29 CFR part 553, 
Subpart C, to incorporate this amendment. In the first sentence of 
proposed Sec.  553.210(a), the statutory amendment language is 
substituted for the current four-part regulatory definition of the term 
``any employee * * * in fire protection activities.'' The proposed rule 
also deletes the last sentence of current section 553.210(a) stating 
that, ``[t]he term would also include rescue and ambulance service 
personnel if such personnel form an integral part of the public 
agency's fire protection services,'' and it deletes the cross-reference 
to section 553.215. The ``integral part'' test for the public agency 
employees is no longer needed because the new statutory standards 
define when such rescue and ambulance personnel qualify as employees in 
fire protection activities. Section 553.215(a) of the current rule 
discusses ambulance and rescue service employees who are employees of a 
public agency other than a fire protection or law enforcement agency. 
The section 3(y) amendment, however, specifically states that one of 
the requirements to be an ``employee in fire protection activities'' is 
that the employee is employed by a fire department of a municipality, 
county, fire district, or State. The proposed rule, therefore, deletes 
section 553.215(a)

[[Page 43658]]

because it permits non-fire department public agencies to treat their 
ambulance and rescue service employees as employees engaged in fire 
protection activities, contrary to the new statutory conditions. This 
proposed rule also deletes Sec. Sec.  553.215(b) (stating that rescue 
service employees of hospitals and nursing homes cannot qualify for the 
exemption) and 553.215(c) (stating that ambulance and rescue service 
employees of private organizations do not come within the exemption) as 
unnecessary in light of the clear statutory requirement for employment 
by a fire department. Finally, in Sec. Sec.  553.221, 553.222, 553.223, 
and 553.226, the Department is substituting ``employee in fire 
protection activities'' or ``employees in fire protection activities,'' 
respectively, wherever the terms ``firefighter'' or ``firefighters'' 
appeared.
    The Department reexamined the other regulations in part 553, 
Subpart C, in light of the section 3(y) amendment to assess whether any 
other changes were appropriate. Current Sec.  553.210 characterizes as 
exempt work related incidental activities such as equipment 
maintenance, lecturing and fire prevention inspections. Current Sec.  
553.210 also recognizes that employees can come within the exemption 
whether their status is ``trainee,'' ``probationary,'' or 
``permanent,'' and regardless of their particular specialty or job 
title or assignment to certain support activities. The Department 
believes that these provisions are consistent with statutory intent and 
remain the appropriate interpretation of the new statutory definition 
and, thus, makes no further changes to section 553.210.
    Current section 553.212 recognizes that exempt employees may engage 
in some nonexempt work, such as firefighters who work for forest 
conservation agencies and who plant trees and perform other 
conservation activities unrelated to their firefighting duties during 
slack times. The Department reexamined this regulation, particularly in 
light of the court's decision in McGavock v. City of Water Valley, 452 
F.3d 423 (5th Cir. 2006). That court noted that the Department had not 
updated its regulations since the passage of section 3(y). It found 
that the regulation at Sec.  553.210, defining an employee in fire 
protection activities, was supplanted by the amendment. It also 
concluded that the 20% tolerance for nonexempt work in Sec.  553.212 
simply put a gloss on the pre-existing regulatory definition. 
Therefore, the court concluded that Sec. Sec.  553.210 and 553.212 were 
``obsolete and without effect.'' 452 F.3d at 428. See also Huff v. 
DeKalb County, Ga., 516 F.3d 1273, 1278 (11th Cir. 2008) (agreeing that 
new section 3(y) is a streamlined definition that made existing 
provisions in Sec. Sec.  553.210 and 553.212 obsolete). Congress stated 
in section 3(y) that an employee must be ``engaged in the prevention, 
control, and extinguishment of fires or response to emergency 
situations where life, property, or the environment is at risk'' in 
order to qualify as an employee in fire protection activities. 29 
U.S.C. 203(y). Congress thus defined emergency medical response work as 
exempt work, when performed by an employee who meets the other tests in 
section 3(y). This proposed rule therefore deletes Sec.  553.212 as 
unnecessary in light of the court decisions and statutory amendment.

6. Stock Options Excluded From the Computation of the Regular Rate

    The Worker Economic Opportunity Act, Public Law No. 106-202, 114 
Stat. 308, enacted by Congress on May 18, 2000, amended Sec. Sec.  7(e) 
and 7(h) of the FLSA. 29 U.S.C. 207(e), (h). In Sec.  7(e), a new 
subsection (8) adds ``[a]ny value or income derived from employer-
provided grants or rights provided pursuant to a stock option, stock 
appreciation right, or bona fide employee stock purchase program'' 
meeting particular criteria to the types of remuneration that are 
excluded from the computation of the regular rate. In Sec.  7(h), the 
amendment clarifies that the amounts excluded under Sec.  7(e) may not 
be counted toward the employer's minimum wage requirement under section 
6, and that extra compensation excluded pursuant to the new subsection 
(8) may not be counted toward overtime pay under Sec.  7.
    The proposed rule incorporates the amendments made by the Worker 
Economic Opportunity Act by adding to the regulatory provisions which 
simply quote the statute in section 778.200(a) and (b). Section 778.208 
also is revised simply to update from ``seven'' to ``eight'' the number 
of types of remuneration excluded in computing the regular rate.

7. Fair Labor Standards Act Amendments of 1974

A. Service Advisors Working for Automobile Dealerships and Boat 
Salespersons
    On April 7, 1974, Congress enacted an amendment to section 
13(b)(10)(B) of the FLSA, 29 U.S.C. 213(b)(10)(B). Public Law No. 93-
259, 88 Stat. 55 (1974). This amendment added an overtime exemption for 
salespersons primarily engaged in selling boats (in addition to the 
pre-existing exemption for sellers of trailers or aircraft). This 
amendment also eliminated the overtime exemption for partsmen and 
mechanics servicing trailers or aircraft. This proposed rule revises 29 
CFR part 779, Subpart D--Exemptions for Certain Retail or Service 
Establishments, so that the regulations implementing section 
13(b)(10)(B) conform to this 1974 amendment. Section 779.371(a) is 
revised to reflect the amendment's addition of boat salespersons to the 
exemption. Proposed Sec.  779.372(a) now clarifies that salespersons 
primarily engaged in selling trailers, boats, or aircraft, but not 
partsmen or mechanics for such vehicles, are covered by the exemption; 
portions of Sec.  779.372(b) and (c) also are changed accordingly.
    Section 13(b)(10)(A) of the FLSA provides that ``any salesman, 
partsman, or mechanic engaged in selling or servicing automobiles, 
trucks or farm implements, if he is employed by a nonmanufacturing 
establishment primarily engaged in the business of selling such 
vehicles or implements to ultimate purchasers'' shall be exempt from 
the overtime requirements of the Act. 29 U.S.C. 213(b)(10)(A). The 
current regulation at 29 CFR 779.372(c)(4) states that an employee 
described as a service manager, service writer, service advisor, or 
service salesman, is not exempt under section 13(b)(10)(A).
    Uniform appellate and district court decisions, however, hold that 
service advisors are exempt under section 13(b)(10)(A) because they are 
``salesmen'' who are primarily engaged in ``servicing'' automobiles. 
See, e.g., Walton v. Greenbrier Ford, Inc., 370 F.3d 446, 452 (4th Cir. 
2004) (The current regulatory interpretation of this exemption is ``an 
impermissibly restrictive construction of the statute.''); Brennan v. 
Deel Motors, Inc., 475 F.2d 1095, 1097 (5th Cir. 1973) (Service 
advisors are ``functionally similar to the mechanics and partsmen who 
service the automobiles. All three work as an integrated unit, 
performing the services necessary * * * with the service salesman 
coordinating these specialties.''); Brennan v. North Brothers Ford, 
Inc., 1975 WL 1074 at *3 (E.D. Mich. 1975) (unpublished) (``The spirit 
of 13(b)(10) is best fulfilled by recognizing the functional similarity 
of service salesmen to partsmen and mechanics which are both expressly 
exempted.''), aff'd sub. nom. Dunlop v. North Brothers Ford, Inc., 529 
F.2d 524 (6th Cir. 1976) (Table).

[[Page 43659]]

    Based upon the court decisions, the Wage and Hour Division has 
adopted an enforcement position since 1987 that Wage and Hour ``will no 
longer deny the [overtime] exemption for such employees,'' and that the 
regulation would be revised. See Wage and Hour Division Field 
Operations Handbook (FOH) section 24L04(k). Therefore, this proposed 
rule changes Sec.  779.372(c), entitled ``Salesman, partsman, or 
mechanic,'' to follow the courts' consistent holdings that employees 
performing the duties typical of service advisors are within the 
section 13(b)(10)(A) exemption. Section 779.372(c)(1) is revised to 
include such an employee as a salesman primarily engaged in servicing 
automobiles. Section 779.372(c)(4) is rewritten to clarify that such 
employees qualify for the exemption.
B. Tipped Employees
    Section 3(m) of the FLSA defines the term ``wage'' and includes 
conditions for taking tip credits when making wage payments to 
qualifying tipped employees under the FLSA. The Department's tip credit 
regulations were promulgated in 1967, one year after hotels and 
restaurants were brought under the FLSA. Section 13(e) of the Fair 
Labor Standards Act Amendments of 1974 amended the last sentence of 
section 3(m) by providing that an employer could not take a tip credit 
unless:

    (1) [its] employee has been informed by the employer of the 
provisions of this subsection and (2) all tips received by such 
employee have been retained by the employee, except that this 
subsection shall not be construed to prohibit the pooling of tips 
among employees who customarily and regularly receive tips.

    Public Law No. 93-259, Sec.  13(e), 88 Stat. 55.
    Prior notice by the employer to employees of the employer's intent 
to avail itself of the tip credit is a statutory requirement pursuant 
to the 1974 amendments. Courts have disallowed the use of the tip 
credit for lack of notice even ``where the employee has actually 
received and retained base wages and tips that together amply satisfy 
the minimum wage requirements,'' remarking that ``[i]f the penalty for 
omitting notice appears harsh, it is also true that notice is not 
difficult for the employer to provide.'' Reich v. Chez Robert, Inc., 28 
F.3d 401, 404 (3d Cir. 1994) (citing Martin v. Tango's Restaurant, 969 
F.2d 1319, 1323 (1st Cir. 1992)). Although written notice is frequently 
provided, it is not required to satisfy the employer's notice burden. 
Compare Kilgore v. Outback Steakhouse of Florida, Inc., 160 F.3d 294, 
299 (6th Cir. 1998) (written notice provided to all applicants as 
matter of course), with Pellon v. Business Representation Int'l, Inc., 
528 F. Supp. 2d 1306, 1310-11 (S.D. Fla. 2007), appeal docketed, No. 
08-10133 (11th Cir. Jan. 8, 2008) (Section 3(m)'s requirement was met 
through verbal notice that plaintiff would be paid $2.13 plus tips, 
combined with prominent display of FLSA poster explaining tip credit). 
Additionally, while employees must be ``informed'' of the employer's 
use of the tip credit, the employer need not ``explain'' the tip 
credit. See Kilgore, 160 F.3d at 298 (``[A]n employer must provide 
notice to the employees, but need not necessarily `explain' the tip 
credit * * * `[I]nform' requires less from an employer than the word 
`explain.' ''); cf. Bonham v. Copper Cellar Corp., 476 F. Supp. at 101 
& n.6 (``vague references to conversations about the minimum wage'' are 
insufficient to establish section 3(m) notice).
    The second provision of the 1974 amendments to section 3(m) made it 
clear that tipped employees must receive at least the minimum wage and 
must generally retain any tips received by them as gratuities for 
services performed. An employer, however, can take advantage of a ``tip 
credit'' to offset a portion of its minimum wage obligation. Prior to 
the 1974 amendments, the compensation of tipped employees was often a 
matter of agreement. Tipped employees could agree, for example, that an 
employer was only obligated to pay cash wages when an employee's tips 
were less than the minimum wage, or that the employee's tips would be 
turned over to the employer, who could then use the tips to pay the 
minimum wage. See Usery v. Emersons Ltd., 1976 WL 1668, *2 (E.D. Va. 
1976), vacated and remanded on other grounds sub. nom. Marshall v. 
Emersons Ltd., 593 F.2d 565 (4th Cir. 1979). The 1974 amendments to 
section 3(m) were intended to prohibit such agreements. See S. Rep. No. 
93-690, at 43 (1974) (``The latter provision is added to make clear the 
original Congressional intent that an employer could not use the tips 
of a `tipped employee' to satisfy more than 50 percent of the Act's 
applicable minimum wage.''). The Department's current regulations, 
which were in effect prior to the 1974 amendments and allowed an 
employer to require employees to turn over all their tips to the 
employer, were therefore invalidated by the amendment to the extent 
that turning tips over to the employer effectively cuts into the 
minimum wage.
    Under the 1974 amendments to section 3(m), an employer's ability to 
utilize an employee's tips to satisfy any portion of the employer's 
minimum wage obligation was limited to taking a credit against the 
employee's tips of up to 50 percent of that obligation. Section 3(m) 
provides the only method by which an employer may use tips received by 
an employee to satisfy the employer's minimum wage obligation. An 
employer's only options under section 3(m) are to take a credit against 
the employee's tips of up to the statutory differential, or to pay the 
entire minimum wage directly. See Wage and Hour Opinion Letter WH-536, 
1989 WL 610348 (October 26, 1989) (defining when an employer does not 
claim a tip credit as when the employer does not retain any tips and 
pays the employee the minimum wage).
    Thus, in a situation in which an employee earns $10 an hour in tips 
and the employer pays $2.13 an hour in cash wages and claims the 
statutory maximum as a tip credit, the employee has received only the 
minimum wage under section 3(m). (Under section 3(m), the ``wage'' of a 
tipped employee equals the sum of the cash wage paid by the employer 
and the amount it claimed as a tip credit.) The amount of tips the 
employee received in excess of the tip credit are not considered 
``wages'' paid by the employer and any deductions from the employee's 
tips made by the employer would therefore result in a violation of the 
employer's minimum wage obligation. If, however, the employer paid the 
employee a direct wage in excess of the minimum wage--and thus did not 
claim a credit against any portion of the employee's tips--the employer 
would be able to make deductions so long as they did not reduce the 
direct wage payment below the minimum wage. See Wage and Hour Opinion 
Letter WH-536, 1989 WL 610348 (October 26, 1989). In such a situation, 
the deduction would be viewed as coming from the employer's wage 
payment that exceeds the minimum wage.
    The proposed rule updates the regulations to incorporate the 1974 
amendments, the legislative history, subsequent court decisions, and 
the Department's interpretations. Sections 531.52, 531.55(a), 
531.55(b), and 531.59 eliminate references to employment agreements 
providing either that tips are the property of the employer or that 
employees will turn tips over to their employers, and clarify that the 
availability of the tip credit provided by section 3(m) requires that 
all tips

[[Page 43660]]

received must be paid out to tipped employees in accordance with the 
1974 amendments. Section 531.55(a), which describes compulsory service 
charges, also is updated by changing the example of such a charge from 
10 percent to 15 percent to reflect more current customary industry 
practices.
    The 1974 amendments also clarified that section 3(m)'s statement 
that employees must retain their tips does not preclude the practice of 
tip pooling ``among employees who customarily and regularly receive 
tips.'' 29 U.S.C. 203(m). The Department's regulation on the subject 
provides that ``the amounts received and retained by each individual 
[through a tip pooling arrangement] as his own are counted as his tips 
for purposes of the Act.'' 29 CFR 531.54.
    Wage and Hour interpreted the tip pooling clause more fully in 
opinion letters and in its FOH. The FOH provides, for example, that a 
tip pooling arrangement cannot require employees to contribute a 
greater percentage of their tips to the tip pool than is ``customary 
and reasonable.'' FOH section 30d04(b). The agency expanded upon this 
position, in its opinion letters and in litigation, that ``customary 
and reasonable'' equates to 15 percent of an employee's tips or two 
percent of daily gross sales. See, e.g., Wage and Hour Opinion Letter 
WH-468, 1978 WL 51429 (Sept. 5, 1978). Several courts have rejected the 
agency's maximum contribution percentages, however, ``because neither 
the statute nor the regulations mention [the requirement stated in the 
agency interpretation] and the opinion letters do not explain the 
statutory source for the limitation that they create.'' Kilgore v. 
Outback Steakhouse of Fla., Inc., 160 F.3d 294, 302-03 (6th Cir. 1998); 
see Davis v. B&S, Inc., 38 F. Supp. 2d 707, 718 n.16 (N.D. Ind. 1998) 
(citing Dole v. Continental Cuisine, Inc., 751 F. Supp. 799, 803 (E.D. 
Ark. 1990) (``The Court can find no statutory or regulatory authority 
for the Secretary's opinion [articulated in an opinion letter] that 
contributions in excess of 15% of tips or 2% of daily gross sales are 
excessive.'')). Based on these court decisions and the unequivocal 
statutory language, the proposed rule updates Sec.  531.54 to clarify 
that section 3(m) of the FLSA does not impose a maximum tip pool 
contribution percentage. However, the proposed rule states that the 
employer must inform each employee of the required tip pool 
contribution, and an employee's participation in a tip pool cannot 
bring the employee's wages below the minimum wage.
    The 1974 amendments also revised another aspect of section 3(m). 
Prior to the 1974 amendments, section 3(m) of the FLSA provided that an 
employee could petition the Wage and Hour Administrator to review the 
tip credit claimed by an employer. See Public Law No. 89-601, 80 Stat. 
830 (1966) (``[I]n the case of an employee who (either himself or 
acting through his representative) shows to the satisfaction of the 
Secretary that the actual amount of tips received by him was less than 
the amount determined by the employer as the amount by which the wage 
paid him was deemed to be increased * * * the amount paid such employee 
by his employer shall be deemed to have been increased by such lesser 
amount.''). The 1974 amendments eliminated the review clause to clarify 
that the employer, not the employee, bears the ultimate burden of 
proving ``the amount of tip credit, if any, [he] is entitled to 
claim.'' S. Rep. No. 93-690, at 43. Two outdated regulatory provisions 
promulgated in 1967, however, still purport to permit petitions to the 
Wage and Hour Administrator for tip credit review despite the fact that 
the statute no longer provides for this review. See 29 CFR 531.7, 
531.59.
    Consistent with the 1974 amendments, this proposed rule deletes 
section 531.7, which permits employees to petition the Wage and Hour 
Administrator for tip credit review. References to the Administrator's 
review in section 531.59 are also deleted, and the language is updated 
to reflect the burden on the employer to prove the amount of the tip 
credit to which it is entitled.

8. Fair Labor Standards Act Amendments of 1977

    On November 1, 1977, Congress amended section 3(t) of the FLSA, 29 
U.S.C. 203(t). Public Law No. 95-151, Sec.  3(a), 91 Stat. 1245. 
Section 3(t) of the FLSA defines the phrase ``tipped employee.'' Prior 
to the 1977 amendment, the definition encompassed ``any employee 
engaged in an occupation in which he customarily and regularly receives 
more than $20 a month in tips.'' The 1977 amendment raised the 
threshold in section 3(t) to $30 a month in tips.
    To reflect the 1977 amendment, this proposed rule changes the 
references in 29 CFR 531.50(b), 531.51, 531.56(a)-(e), 531.57, and 
531.58 from $20 to $30.

9. Meal Credit Under Section 3(m)

    The proposed rule further amends Sec.  531.30 to incorporate Wage 
and Hour's longstanding enforcement position regarding the voluntary 
acceptance of meals. A ``wage'' paid pursuant to section 3(m) of the 
FLSA may include ``the reasonable cost * * * to the employer of 
furnishing * * * board, lodging, or other facilities * * * customarily 
furnished by such employer to his employees.'' 29 U.S.C. 203(m). 
``Facilities'' include employer-provided meals. See 29 CFR 531.32. The 
Department's regulation at 29 CFR 531.30, however, provides that an 
employer's ability to take credit for a facility is limited to those 
instances where an employee's acceptance was ``voluntary and 
uncoerced.'' In other words, an employer could not take a wage credit 
for employees who did not choose to accept the meal.
    After a number of courts rejected the agency's position on this 
point with regard to credit for meals, the agency adopted an 
enforcement position providing that an employer can take a meal credit 
even if an employee does not voluntarily accept the meal. See FOH 
section 30c09(b) (``WH no longer enforces the `voluntary' provision 
with respect to meals.''); see also Davis Bros., Inc. v. Donovan, 700 
F.2d 1368, 1370 (11th Cir. 1983); Donovan v. Miller Properties, Inc., 
711 F.2d 49, 50 (5th Cir. 1983).
    Thus, under the agency's current enforcement policy articulated in 
the FOH, an employer may require an employee to accept a meal provided 
by the employer as a condition of employment, and may take credit for 
the actual cost of that meal even if the employee's acceptance is not 
voluntary. The proposed rule amends 29 CFR 531.30 to reflect previous 
court decisions and the agency's current enforcement posture on meal 
credits.

10. Section 7(o) Compensatory Time Off

    Section 7 of the FLSA requires that a covered employee receive 
compensation for hours worked in excess of 40 in a workweek at a rate 
not less than one and one-half times the regular rate of pay at which 
the employee is employed. 29 U.S.C. 207(a). In 1985, subsequent to the 
U.S. Supreme Court's decision in Garcia v. San Antonio Metropolitan 
Transit Authority, 469 U.S. 528 (1985), which held that the FLSA may be 
constitutionally applied to state and local governments, Congress added 
section 7(o), 29 U.S.C. 207(o), to the FLSA to permit public agencies 
to grant employees compensatory time off in lieu of cash overtime 
compensation pursuant to an agreement with employees or their 
representatives. The purpose of this exception to the Act's usual 
requirement of cash overtime pay was ``to provide flexibility to state 
and local government employers and an

[[Page 43661]]

element of choice to their employees regarding compensation for 
statutory overtime hours.'' H.R. Rep. No. 331, 99th Cong., 1st Sess. 19 
(1985).
    Section 7(o) provides a detailed scheme for the accrual and use of 
compensatory time off. Subsection 7(o)(1) authorizes the provision of 
compensatory time off in lieu of overtime pay. Subsection 7(o)(2) 
specifies how a public employer creates a compensatory time off plan. 
Subsection 7(o)(3) establishes limits for the amount of compensatory 
time off that an employee may accrue. Section 7(o)(4) provides the 
requirements for cashing out compensatory time upon an employee's 
termination. Section 7(o)(5) governs a public employee's use of accrued 
compensatory leave. That section states:

    An employee of a public agency which is a State, political 
subdivision of a State, or an interstate governmental agency--(A) 
who has accrued compensatory time off authorized to be provided 
under paragraph (1), and (B) who has requested the use of such 
compensatory time, shall be permitted by the employee's employer to 
use such time within a reasonable period after making the request if 
the use of the compensatory time does not unduly disrupt the 
operations of the public agency.

29 U.S.C. 207(o)(5)(A), (B).
    In 1987, after notice and comment, the Department issued final 
regulations implementing section 7(o) (29 CFR 553.20-.28). Section 
553.25 of the regulations implements section 7(o)(5)'s requirements 
regarding the use of compensatory time off. Section 553.25(c) provides:

    (1) Whether a request to use compensatory time has been granted 
within a ``reasonable period'' will be determined by considering the 
customary work practices within the agency based on the facts and 
circumstances in each case. Such practices include, but are not 
limited to (a) the normal schedule of work, (b) anticipated peak 
workloads based on past experience, (c) emergency requirements for 
staff and services, and (d) the availability of qualified substitute 
staff.
    (2) The use of compensatory time in lieu of cash payment for 
overtime must be pursuant to some form of agreement or understanding 
between the employers and the employee (or the representative of the 
employee) reached prior to the performance of the work. (See Sec.  
553.23). To the extent that the []conditions under which an employee 
can take compensatory time off are contained in an agreement or 
understanding as defined in Sec.  553.23, the terms of such 
agreement or understanding will govern the meaning of ``reasonable 
period''.

    Section 553.25(d) states:

    When an employer receives a request for compensatory time off, 
it shall be honored unless to do so would be ``unduly disruptive'' 
to the agency's operations. Mere inconvenience to the employer is an 
insufficient basis for denial of a request for compensatory time 
off. (See H. Rep. 99-331, p. 23.) For an agency to turn down a 
request from an employee for compensatory time off requires that it 
should reasonably and in good faith anticipate that it would impose 
an unreasonable burden on the agency's ability to provide services 
of acceptable quality and quantity for the public during the time 
requested without the use of the employee's services.

    In recent years, a number of courts have examined the proper 
interpretation of section 7(o)(5)(B)'s ``reasonable period'' 
requirement with regard to whether an employer must allow an employee 
to take off the specific days that the employee requests unless that 
time off would cause an undue disruption.
    In Mortensen v. County of Sacramento, 368 F.3d 1082 (9th Cir. 
2004), the court held that under section 7(o)(5)(B), a public agency 
may deny its employees the right to use accrued compensatory time off 
on the specific days they request, without establishing that such use 
of compensatory time would ``unduly disrupt the operations of the 
public agency.'' The court relied upon the statutory language providing 
that an employee who has requested the use of compensatory time ``shall 
be permitted * * * to use such time within a reasonable period after 
making the request.'' 29 U.S.C. 207(o)(5)(B). The court held that this 
language unambiguously states that once an employee requests 
compensatory time off, the employer must allow the employee to use the 
time within a reasonable period after the request and, thus, it does 
not require the employer to grant the time off on the specific days 
requested. In the court's opinion, section 7(o)(5)(B)'s ``unduly 
disrupt'' clause merely indicates the condition that releases an 
employer from the obligation to permit the use of compensatory time 
within a ``reasonable period'' after it is requested. Because the court 
found no ambiguity in the statute, it declined to defer to the 
Department's regulation at 29 CFR 553.25(d). Accord Scott v. City of 
New York, 340 F. Supp. 2d 371, 380 (S.D.N.Y. 2004).
    Similarly, in Houston Police Officers Union v. City of Houston, 330 
F.3d 298 (5th Cir.), cert. denied, 540 U.S. 879 (2003), the court held 
that the plain language of section 207(o)(5)(B) does not require a 
public agency to grant compensatory time off on the date specifically 
requested, but instead requires that the agency permit the leave within 
a reasonable period after the employee requests its use. The court 
stated that ``mandating a `reasonable period' for use of comp time is 
different from mandating the employee's chosen dates. The language 
offers a span of time to the employer, the beginning of which is the 
date of the employee's request.'' 330 F.3d at 303. The court noted that 
if granting the request would unduly disrupt operations, the public 
agency is released from the previously imposed requirement. Because the 
court deemed the statutory language unambiguous, it held that deference 
to the Department's regulation would be inappropriate. Moreover, the 
court stated that even if the statute were ambiguous, the regulation at 
section 553.25(d) ``simply does not address whether the statute 
mandates an employee's specifically requested dates for comp time.'' 
330 F.3d at 304. The court (330 F.3d at 304-05) also refused to defer 
to the Department's amicus curiae brief filed in DeBraska v. City of 
Milwaukee, 131 F. Supp. 2d 1032 (E.D. Wis. 2000).\1\
---------------------------------------------------------------------------

    \1\ In contrast to Houston Police Officers Union, the district 
court in DeBraska v. City of Milwaukee, 131 F. Supp. 2d at 1034, 
found that the statute was ``somewhat ambiguous.'' The court held 
that section 7(o)(5)(B) establishes that if an employee gives 
reasonable notice of a request for compensatory time, the specific 
days requested must be granted unless the employer demonstrates that 
the leave would unduly disrupt the employer's services to the 
public. The court thus agreed with the interpretation of section 
7(o)(5) presented in the Department's amicus curiae brief, and it 
concluded that the current regulations support this view, because 
Sec.  553.25(d) provides that in order to deny a compensatory leave 
request an agency must believe that granting the leave would 
``impose an unreasonable burden on the agency's ability to provide 
services of acceptable quality and quantity for the public during 
the time requested[.]'' (Emphasis added). The court stated that 
granting time off on an alternate date would be inconsistent with 
this phrase.
---------------------------------------------------------------------------

    In Aiken v. City of Memphis, 190 F.3d 753 (6th Cir. 1999), cert. 
denied, 528 U.S. 1157 (2000), the court held that the plaintiffs-police 
officers' collective bargaining agreement with the City of Memphis 
permitted the City to deny the specific day requested for the use of 
compensatory time without a showing that such use would unduly disrupt 
its operations. Under the agreement, the City required police officers 
requesting compensatory time to sign the precinct's ``comp time'' log 
book within 30 days of the requested day off. Once the commanding 
officer determined that additional requests for a particular day would 
adversely affect the functioning of the unit, no additional requests 
for the use of compensatory time on that day were allowed.
    The plaintiffs-police officers argued that the City's practice of 
denying officers the use of compensatory time off on a particular day 
violated section 7(o)(5)(B) because the City denied the leave without 
satisfying the ``unduly

[[Page 43662]]

disrupt'' standard. The court rejected the argument on the ground that 
it ``completely ignores the phrase `reasonable period,' which the Act 
gives the parties the freedom to define.'' 190 F.3d at 756 (citations 
omitted). The court noted that the regulations provide that to the 
extent that the parties' agreement specifies ``the conditions under 
which an employee can take compensatory time off * * * the terms of 
such agreement or understanding will govern the meaning of `reasonable 
period.' '' 190 F.3d at 756-57 (quoting 29 CFR 553.25(c)(2)). The court 
reasoned that the parties had agreed that ``the reasonable period for 
requesting the use of banked compensatory time begins thirty days prior 
to the day in question and ends when the number of officers requesting 
the use of compensatory time on the given date would bring the 
precinct's staffing levels to the minimum level necessary for efficient 
operation.'' 190 F.3d at 757. Therefore, on this basis, the court 
upheld the district court's determination that the City had not 
violated section 7(o)(5)(B). See Beck v. City of Cleveland, 390 F.3d 
912 (6th Cir. 2004), cert. denied, 125 S. Ct. 2930 (2005) (Aiken 
involved the ``reasonable period'' clause of section 7(o)(5)(B)).
    The appellate decisions uniformly read the statutory language 
unambiguously to state that once an employee requests compensatory time 
off, the employer has a reasonable period of time to allow the employee 
to use the time, unless doing so would be unduly disruptive. The 
Department proposes to revise the current rule to adhere to the 
appellate court rulings cited above. Proposed Sec.  553.25(c) adds a 
sentence that states that section 7(o)(5)(B) does not require a public 
agency to allow the use of compensatory time on the day specifically 
requested, but only requires that the agency permit the use of the time 
within a reasonable period after the employee makes the request, unless 
the use would unduly disrupt the agency's operations. Additionally, the 
phrase ``within a reasonable period after the request'' has been added 
to the final sentence of proposed Sec.  553.25(d) and the phrase 
``during the time requested'' has been replaced with ``during the time 
off'' to clarify the employer's obligation.

11. Fluctuating Workweek Method of Computing Overtime Under 29 CFR 
778.114

    The proposed rule would also clarify the Department's regulation at 
29 CFR 778.114 addressing the fluctuating workweek method of computing 
overtime compensation for salaried nonexempt employees. The current 
regulation provides that an employer may use the fluctuating workweek 
method for computing half-time overtime compensation if an employee 
works fluctuating hours from week to week and receives, pursuant to an 
understanding with the employer, a fixed salary as straight-time 
compensation ``(apart from overtime premiums)'' for whatever hours the 
employee is called upon to work in a workweek, whether few or many. In 
such cases, an employer satisfies the overtime pay requirement of 
section 7(a) of the FLSA if it compensates the employee, in addition to 
the salary amount, at least one-half of the regular rate of pay for the 
hours worked in excess of 40 hours in each workweek. Because the 
employee's hours of work fluctuate from week to week, the regular rate 
must be determined separately each week based on the number of hours 
actually worked each week. The payment of additional bonus supplements 
and premium payments to employees compensated under the fluctuating 
workweek method has presented challenges to both employers and the 
courts in applying the current regulations.
    The proposed regulation provides that bona fide bonus or premium 
payments do not invalidate the fluctuating workweek method of 
compensation, but that such payments (as well as ``overtime premiums'') 
must be included in the calculation of the regular rate unless they are 
excluded by FLSA sections 7(e)(1)-(8). The proposal also adds an 
example to Sec.  778.114(b) to illustrate these principles where an 
employer pays an employee a nightshift differential in addition to a 
fixed salary.
    Paying employees bonus or premium payments for certain activities 
such as working undesirable hours is a common and beneficial practice 
for employees. Moreover, the Department's proposed clarification is 
consistent with the Supreme Court's decision in Overnight Motor 
Transportation Co. v. Missel, 316 U.S. 572 (1942), on which the 
existing regulation is patterned. That case held that, where a 
nonexempt employee had received only a fixed weekly salary (with no 
additional overtime premium pay) for working variable irregular hours 
that regularly exceeded 40 per week and fluctuated from week to week, 
the employer was required to retroactively pay an additional 50% of the 
employee's regular rate of pay multiplied by the overtime hours worked 
to satisfy the FLSA's time and a half overtime pay requirement. Id. at 
573-74, 580-81. The quotient of the weekly wage divided by the number 
of hours actually worked each week, including the overtime hours, 
determined the ``regular rate at which [the] employee [was] employed'' 
under the fixed salary arrangement. Id. at 580. The Department's 
proposed clarification would eliminate any disincentive for employers 
to pay additional bona fide bonus or premium payments.

IV. Paperwork Reduction Act

    This rule does not impose new information collection requirements 
for purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et 
seq.

V. Executive Order 12866; Small Business Regulatory Enforcement 
Fairness Act; Regulatory Flexibility

    This proposed rule is not economically significant within the 
meaning of Executive Order 12866, or a ``major rule'' under the 
Unfunded Mandates Reform Act or Section 801 of the Small Business 
Regulatory Enforcement Fairness Act.
    As discussed previously in this preamble, over the years, Congress 
has amended the FLSA to refine or to add to exemptions and to clarify 
the minimum wage and overtime pay requirements. However, in many cases, 
the Department of Labor has not revised the FLSA regulations to comport 
with these statutory changes. The Department believes that the existing 
outdated regulatory provisions may cause confusion within the regulated 
community resulting in inadvertent violations and the costs of 
corrective compliance measures to remedy them.
    The Department has determined that the proposed changes will not 
result in any additional compliance costs for regulated entities 
because the current compliance obligations derive from current law and 
not the outdated regulatory provisions that have been superseded years 
ago.
    The Department is aware that this interpretation appears to be 
inconsistent with OMB Circular A-4's guidance on the use of analysis 
baselines, which states: ``In some cases, substantial portions of a 
rule may simply restate statutory requirements that would be self-
implementing, even in the absence of the regulatory action. In these 
cases, you should use a pre-statute baseline'' to conduct the 
preliminary regulatory impact analysis. However, as the discussion 
below indicates, the Department believes the use of a pre-statute 
baseline would be extremely difficult for statutes enacted a decade or 
more in the past. Fundamental changes in the economy and labor market 
(e.g., the introduction of technology, changes in the size and 
composition of the labor

[[Page 43663]]

force, changes in the economy that impact the demand for labor, etc.) 
would make it difficult, if not impossible, to separate those changes 
from changes that resulted from enactment of the statute.
    Moreover, the Department believes the economic impacts due to the 
statutory changes to the FLSA are typically greatest in the short run 
and diminish over time. This is due to labor markets determining the 
most efficient way to adjust to the new requirements, and because the 
Department believes many of the changes mandated by various revisions 
to the FLSA are reflective of the natural evolution of the labor market 
and would have become more common even in the absence of regulatory 
changes.\2\ Therefore, the impacts resulting from the promulgation of 
the proposed regulations are not likely to be measurable. In fact, the 
Department anticipates that if implemented as a final rule, this 
proposed rule will simply enhance the Department's enforcement of, and 
the public's understanding of, compliance obligations under the FLSA by 
replacing outdated regulations with updated provisions that reflect 
current law.
---------------------------------------------------------------------------

    \2\ For example, as nominal wages rise over time, the marginal 
impact of a fixed minimum wage provision decreases, since it is less 
binding on the market.
---------------------------------------------------------------------------

    The Department requests comments on this assessment.

1996 and 2007 Amendments to the FLSA Minimum Wage

    The current FLSA regulations reference the minimum wage in several 
places. In some places the regulations refer to the 1981 minimum wage 
of $3.35 while in others they refer to the 1991 minimum wage of $4.25.
    In order to avoid the current inconsistencies between the FLSA 
regulations and the statute the Department is proposing to revise the 
regulations so that they refer to the statutory minimum wage rather 
than a specific minimum wage. Since the proposed regulations do not 
include any reference to a specific minimum wage, the Department 
believes they do not impose the burden of increasing the minimum wage 
from the levels specified in the current regulations. That burden was 
imposed by the statutory changes and is unrelated to the FLSA 
regulations.
    Thus, the Department concludes that the only incremental effect of 
this proposal on the public from these changes is possibly clearing up 
some confusion. This differentiates the minimum wage provisions from 
many other rulemakings in which DOL is given little statutory 
discretion, but nonetheless is still required to update the CFR.

Small Business Job Protection Act of 1996

    Sections 2101 through 2103 of Title II of SBJPA, entitled the 
``Employee Commuting Flexibility Act of 1996,'' amended section 4(a) of 
the Portal Act, 29 U.S.C. 254(a) to state that for travel time 
involving the employee's use of employer-provided vehicles for 
commuting at the beginning and end of the workday to be considered 
noncompensable, the use of the vehicle must be ``conducted under an 
agreement between the employer and the employee or the employee's 
representative.'' The Department believes that since 1996 the labor 
market has adjusted to this statutory change and that it would be very 
difficult, if not impossible, to estimate the impact of this amendment. 
It is likely that as part of their overall compensation package, some 
employers and their employees have agreed to make the travel time 
compensable while others have agreed to make it noncompensable. In 
addition, since this provision simply clarifies that compensability 
should be subject to an agreement, but does not otherwise restrict the 
type of agreement employers and employees may reach, the Department 
believes this provision by its nature does not impose a significant 
burden on the public. Therefore, the Department concludes that the 
proposed regulatory changes will have no measurable effect on the 
public except to possibly clear up some confusion.
    In addition, section 2105 of the SBJPA amended the FLSA effective 
August 20, 1996, by adding section 6(g), 29 U.S.C. 206(g), which 
provides that ``[a]ny employer may pay any employee [who has not 
attained the age of 20] of such employer, during the first 90 
consecutive calendar days after such employee is initially employed by 
such employer, a wage which is not less than $4.25 an hour.'' The 
Department believes that the labor market has also adjusted to this 
change during the period since the enactment of the SBJPA. Although 
youths would obviously want to receive the normal minimum wage rather 
than the youth wage, some youths will decide to accept the lower youth 
wage in order to gain experience in the labor market. Similarly, 
although some employers may like to pay the lower youth wage, some may 
find compliance with the added requirements associated with the youth 
wage not to be worth the savings in wages. Thus, the Department 
concludes that the proposed regulatory changes will have no measurable 
effect on the public except to possibly clear up some confusion.

Agricultural Workers on Water Storage/Irrigation Projects

    Public Law No. 105-78, 111 Stat. 1467 (Nov. 13, 1997), amended 
section 13(b)(12) of the FLSA, 29 U.S.C. 213(b)(12), by extending the 
exemption from overtime pay requirements applicable to workers on water 
storage and irrigation projects where at least 90 percent of the water 
is used for agricultural purposes, rather than where the water is used 
exclusively for agricultural purposes. The Department believes that the 
labor market has also adjusted to this change during the period since 
the enactment of the amendment. Although agricultural workers and 
workers employed on water storage/irrigation projects listed in the 
exemption are not required to be paid time and one-half for the hours 
worked in excess of 40 in a work week, their overall compensation will 
be determined by market forces. In some cases, employers and their 
employees will choose some form of premium overtime pay (even though it 
is not mandated by the FLSA) while others may choose a higher salary 
with no additional compensation for the hours worked in excess of 40 in 
a week. In addition, this provision applies to a relatively small part 
of the overall U.S. labor force, thus the Department believes any 
possible impacts due to this exemption would likely not be substantial. 
Thus, the Department concludes that the proposed regulatory changes 
will have no measurable effect on the public except to possibly clear 
up some confusion.

Certain Volunteers at Private Non-Profit Food Banks

    Section 1 of the Amy Somers Volunteers at Food Banks Act, Public 
Law No. 105-221, 112 Stat. 1248 (Aug. 7, 1998), amended section 3(e) of 
the FLSA, 29 U.S.C. 203(e), by adding section (5) to provide that the 
term ``employee'' does not include individuals volunteering solely for 
humanitarian purposes at private non-profit food banks and who receive 
groceries from those food banks. 29 U.S.C. 203(e)(5). The Department 
believes that the labor market has also adjusted to this change during 
the period since the enactment of the amendment. The Department also 
believes this regulatory change is not likely to have caused an impact 
we would consider significant, since it applies to a small part of the 
public and

[[Page 43664]]

simply clarifies that certain individuals may be considered volunteers.

Employees Engaged in Fire Protection Activities

    In 1999, Congress amended section 3 of the FLSA, 29 U.S.C. 203, by 
adding section (y) to define ``an employee in fire protection 
activities.'' This change in definition impacts the employees who may 
be covered by the partial overtime exemption allowed by Sec.  7(k) (29 
U.S.C. 207(k)) or the overtime exemption for public agencies with fewer 
than five employees in fire protection activities pursuant to Sec.  
13(b)(20) (29 U.S.C. 213(b)(20)).
    The Department believes that these provisions apply to a relatively 
small proportion of the labor market, and that the market has adjusted 
to this change during the period since the enactment of the amendment. 
Although employees engaged in fire protection activities are not 
required to be paid time and one-half for the hours worked in excess of 
40 in a work week, but rather must be paid overtime pursuant to section 
7(k) of the FLSA, 29 U.S.C. 207(k), their overall compensation will be 
determined by market forces. In some cases, employers and their 
employees will choose some form of premium overtime pay (even where it 
is not mandated by the FLSA) while others may choose a higher salary 
with no additional compensation for the excess hours.
    Similarly, the Department believes that the market has adjusted to 
no exemptions for the ambulance and rescue service employees of non-
fire department public agencies (Sec.  553.215(b)), the rescue service 
employees of hospitals and nursing homes, and the ambulance and rescue 
service employees of private organizations because the statute clearly 
requires employment by a fire department for the exemption. While there 
may have been some short run effects related to the statutory change, 
in the years since the enactment of the statute, employers and their 
employees have adjusted to the overtime requirement.
    Thus, the Department concludes that the proposed regulatory changes 
will have no measurable effect on the public except to possibly clear 
up some confusion.

Stock Options Excluded From the Computation of the Regular Rate

    The Worker Economic Opportunity Act enacted by Congress on May 18, 
2000, amended Sec. Sec.  7(e) and 7(h) of the FLSA. 29 U.S.C. 207(e), 
(h). In Sec.  7(e), a new subsection (8) adds ``[a]ny value or income 
derived from employer-provided grants or rights provided pursuant to a 
stock option, stock appreciation right, or bona fide employee stock 
purchase program'' meeting particular criteria to the types of 
remuneration that are excluded from the computation of the regular 
rate. In Sec.  7(h), the amendment clarifies that the amounts excluded 
under Sec.  7(e) may not be counted toward the employer's minimum wage 
requirement under section 6, and that extra compensation excluded 
pursuant to the new subsection (8) may not be counted toward overtime 
pay under Sec.  7. The Department believes that the labor markets have 
adjusted to this statute, which provides additional alternatives for 
employee compensation, but does not otherwise limit or mandate the 
overall levels of compensation owed to any category of worker. The 
proposed regulatory changes merely help to correct any confusion in 
this area.

Fair Labor Standards Act Amendments of 1974 and 1977

    On April 7, 1974, Congress enacted an amendment to section 
13(b)(10)(B) of the FLSA, 29 U.S.C. 213(b)(10)(B). Public Law No. 93-
259, 88 Stat. 55 (1974). This amendment added an overtime exemption for 
salespersons primarily engaged in selling boats (in addition to the 
pre-existing exemption for sellers of trailers or aircraft). This 
amendment also eliminated the overtime exemption for partsmen and 
mechanics servicing trailers or aircraft.
    The Department believes that these provisions apply to a relatively 
small proportion of the labor market, and that the labor market has 
also adjusted to this change during the long period since the enactment 
of the amendment. Although salespersons primarily engaged in selling 
boats are not required to be paid time and one-half for the hours 
worked in excess of 40 in a work week, their overall compensation will 
be determined by market forces. In some cases, employers and their 
employees may choose some form of premium overtime pay (even though it 
is not mandated by the FLSA) while others may choose a higher salary 
and commissions with no additional compensation for the hours worked in 
excess of 40 in a week.
    Similarly, the Department believes that the market has adjusted to 
no exemptions for partsmen and mechanics servicing trailers or 
aircraft. Although there may have been some short run effects related 
to the statutory change, in the years since enactment of the statute, 
employers and their employees have adjusted to the overtime 
requirement. Thus, the Department concludes that the proposed 
regulatory changes will have no measurable effect on the public except 
to possibly clear up some confusion.
    On November 1, 1977, Congress amended section 3(t) of the FLSA, 29 
U.S.C. 203(t). Public Law No. 95-151, Sec.  3(a), 91 Stat. 1245. 
Section 3(t) of the FLSA defines the phrase ``tipped employee.'' The 
amendment changed the conditions for taking the tip credit when making 
wage payments to qualifying tipped employees under the FLSA. Prior to 
the 1977 amendment, the definition encompassed ``any employee engaged 
in an occupation in which he customarily and regularly receives more 
than $20 a month in tips.'' The 1977 amendment raised the threshold in 
section 3(t) to $30 a month in tips.
    Although the mandatory paid wage ($2.13) for tipped employees is 
below the minimum wage, these workers must still receive hourly 
compensation (cash wages plus tips) at least equal to the minimum wage. 
Moreover, regardless of the minimum wage, if the hourly compensation is 
too low employers will have trouble finding a sufficient number of 
workers. The Department believes that the labor market has also 
adjusted to this change during the period since the enactment of the 
amendment and that the regulatory changes will have no measurable 
economic effect on the public except to possibly clear up some 
confusion.

Meal Credit Under Section 3(m)

    The proposed rule further amends Sec.  531.30 to incorporate Wage 
and Hour's longstanding enforcement position regarding the voluntary 
acceptance of meals. The Department's current regulation at 29 CFR 
531.30 provides that an employer's ability to take credit for a 
facility is limited to those instances where an employee's acceptance 
is ``voluntary.'' However, after a number of courts rejected the 
Department's position on this point with regard to the credit for 
meals, the Wage and Hour Division adopted an enforcement position in 
the 1980's providing that an employer can take a meal credit even if an 
employee does not voluntarily accept the meal. Thus, under the Wage and 
Hour Division's current enforcement policy articulated in the Field 
Operations Handbook (Section 30c09(b)), an employer may require an 
employee to accept a meal provided by the employer as a condition of 
employment, and may take credit for the actual cost of that meal even 
if the employee's acceptance is not voluntary.
    Since these changes in case law and the Department's enforcement 
policy

[[Page 43665]]

have been in place since the 1980's, the Department believes that the 
labor market has adjusted to this change. Workers who do not want a 
portion of their compensation to take the form of meals will seek other 
employment while other workers might seek employers who provide meals. 
Since the overall compensation will be the result of market forces and 
the market has had decades to adjust to the case law, the proposed 
regulatory changes will have no measurable economic effect on the 
public.

Section 7(o) Compensatory Time Off

    In 1987, the Department issued final regulations implementing a 
detailed scheme for the accrual and use of compensatory time off 
(section 7(o)). Section 7(o)(5) governs a public employee's use of 
accrued compensatory leave. That section states:

    An employee of a public agency which is a State, political 
subdivision of a State, or an interstate governmental agency--(A) 
who has accrued compensatory time off authorized to be provided 
under paragraph (1), and (B) who has requested the use of such 
compensatory time, shall be permitted by the employee's employer to 
use such time within a reasonable period after making the request if 
the use of the compensatory time does not unduly disrupt the 
operations of the public agency.

    29 U.S.C. 207(o)(5). In recent years, a number of courts have 
examined the proper interpretation of section 7(o)(5)(B)'s ``reasonable 
period'' requirement with regard to whether an employer must allow an 
employee to take off the specific days that the employee requests 
unless that time off would cause an undue disruption. The appellate 
courts that have addressed this issue have uniformly read the statutory 
language unambiguously to state that once an employee requests 
compensatory time off, the employer has a reasonable period of time to 
allow the employee to use the time, unless doing so would be unduly 
disruptive. As one court noted, ``mandating a `reasonable period' for 
use of comp time is different from mandating the employee's chosen 
dates.'' Houston Police Officers Union v. City of Houston, 330 F.3d 
298, 303 (5th Cir. 2003).
    Proposed Sec.  553.25(c) adds a sentence that states that section 
7(o)(5)(B) does not require a public agency to allow the use of 
compensatory time on the day specifically requested, but only requires 
that the agency permit the use of the time within a reasonable period 
after the employee makes the request, unless the use would unduly 
disrupt the agency's operations. Additionally, the phrase ``within a 
reasonable period after the request'' has been added to the final 
sentence of proposed Sec.  553.25(d) and the phrase ``during the time 
requested'' has been replaced with ``during the time off'' to clarify 
the employer's obligation.
    The Department believes that the proposed changes will eliminate 
some of the confusion over the use of compensatory time off. Under 
current conditions, some public agency employees may accrue 
compensatory time off under the mistaken belief that they can specify 
an exact date when they will use their accrued compensatory time off. 
The proposed clarification makes it clear that public sector employers 
may permit employees to use accrued compensatory time off within a 
``reasonable period'' after the employee's request is made.
    Even though we believe this clarification is consistent with the 
court's interpretation of current statutory and regulatory 
requirements, and therefore does not change the nature of compensatory 
time off rights and responsibilities, the Department recognizes as a 
result of this regulatory clarification that some employees may choose 
not to accrue compensatory time off. Although the Department typically 
considers existing final regulations as part of the baseline for 
regulatory impact analysis, and therefore feels incorporating these 
court clarifications into the baseline may be consistent with OMB 
Circular A-4 guidance, we would like to recognize that this 
clarification may have some slight impacts. For example, if the supply 
of workers willing to accrue compensatory time off declines, then some 
public sector employers may choose to negotiate with their employees to 
develop an agreement or understanding that provides more flexibility as 
to the use of compensatory time off than the minimum mandated by 
section 7(o). In fact, it is probable that some negotiations between 
public sector employers and their employees has already occurred as a 
result of the court decisions.

Fluctuating Workweek Method of Computing Overtime Under 29 CFR 778.114

    The proposed rule would also clarify the Department's regulation at 
29 CFR 778.114 addressing the fluctuating workweek method of computing 
overtime compensation for salaried employees. The proposed regulation 
provides that bona fide bonus or premium payments do not invalidate the 
fluctuating workweek method of compensation, but that such payments (as 
well as ``overtime premiums'') must be included in the calculation of 
the regular rate unless they are excluded by FLSA sections 7(e)(1)-(8). 
Paying employees bonus or premium payments for certain activities such 
as working undesirable hours is a common and beneficial practice for 
both employers and their employees. The Department's proposed 
clarification would eliminate any disincentive for employers to pay 
additional bona fide bonus or premium payments. The Department has 
determined that the proposed regulatory clarification will have no 
measurable economic effect on the public except to possibly reduce some 
litigation.

Conclusion

    The Department concludes that incorporating these statutory 
amendments and court interpretations into the FLSA and Portal Act 
regulations will not impose any measurable costs on any private or 
public sector entity.
    Furthermore, because the proposed rule will not impose any 
measurable costs on employers, the Department certifies that it would 
not have a significant economic impact on a substantial number of small 
entities. Accordingly, the Department need not prepare an initial 
regulatory flexibility analysis under the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.).

VI. Unfunded Mandates Reform Act

    This proposed rule has been reviewed in accordance with the 
Unfunded Mandates Reform Act of 1995 (UMRA). 2 U.S.C. 1501 et seq. For 
the purposes of the UMRA, the Department certifies that this rule does 
not impose any Federal mandate that may result in increased 
expenditures by State, local, or tribal governments, or increased 
expenditures by the private sector, of more than $100 million in any 
year.

VII. Executive Order 13132 (Federalism)

    The Department has reviewed this rule in accordance with the 
Executive Order on Federalism (Executive Order 13132, 64 FR 43255, Aug. 
10, 1999). This rule does not have federalism implications as outlined 
in E.O. 13132. The rule does 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.

VIII. Executive Order 13175, Indian Tribal Governments

    The Department has reviewed this rule under the terms of Executive 
Order 13175 and determined it did not have

[[Page 43666]]

``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.

IX. Effects on Families

    The Department certifies that this rule will not adversely affect 
the well-being of families, as discussed under section 654 of the 
Treasury and General Government Appropriations Act, 1999.

X. Executive Order 13045, Protection of Children

    The Department has reviewed this rule under the terms of Executive 
Order 13045 and determined this action is not subject to E.O. 13045 
because it is not economically significant as defined in E.O. 12866 and 
it does not impact the environmental health or safety risks of 
children.

XI. Environmental Impact Assessment

    The Department has reviewed this rule in accordance with the 
requirements of the National Environmental Policy Act of 1969 (NEPA), 
42 U.S.C. 4321 et seq., the regulations of the Council of Environmental 
Quality, 40 CFR 1500 et seq., and the Departmental NEPA procedures, 29 
CFR part 11, and determined that this rule will not have a significant 
impact on the quality of the human environment. There is, thus, no 
corresponding environmental assessment or an environmental impact 
statement.

XII. Executive Order 13211, Energy Supply

    The Department has determined that this rule is not subject to 
Executive Order 13211. It will not have a significant adverse effect on 
the supply, distribution or use of energy.

XIII. Executive Order 12630, Constitutionally Protected Property Rights

    The Department has determined that this rule is not subject to 
Executive Order 12630 because it does not involve implementation of a 
policy ``that has taking implications'' or that could impose 
limitations on private property use.

XIV. Executive Order 12988, Civil Justice Reform Analysis

    The Department drafted and reviewed this proposed rule in 
accordance with Executive Order 12988 and determined that the rule 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.

List of Subjects

29 CFR Part 4

    Administrative practice and procedures, Employee benefit plans, 
Government contracts, Labor, Law enforcement, Minimum wages, Penalties, 
Wages.

29 CFR Part 531

    Employment, Labor, Minimum wages, Wages.

29 CFR Part 553

    Firefighters, Labor, Law enforcement officers, Overtime pay, Wages.

29 CFR Part 778

    Employment, Overtime pay, Wages.

29 CFR Part 779

    Compensation, Overtime pay.

29 CFR Part 780

    Agriculture, Irrigation, Overtime pay.

29 CFR Part 785

    Compensation, Hours of work.

29 CFR Part 786

    Compensation, Minimum wages, Overtime pay.

29 CFR Part 790

    Compensation, Hours of work.

Victoria A. Lipnic,
Assistant Secretary, Employment Standards Administration.
Alexander J. Passantino,
Acting Administrator, Wage and Hour Division.

    For the reasons set forth above, the Department proposes to amend 
Title 29, parts 4, 531, 553, 778, 779, 780, 785, 786, and 790 of the 
Code of Federal Regulations as follows:

PART 4--LABOR STANDARDS FOR FEDERAL SERVICE CONTRACTS

    1. The authority citation for part 4 continues to read as follows:

    Authority: 41 U.S.C. 351 et seq.; 41 U.S.C. 38 and 39; 5 U.S.C. 
301.


Sec.  4.159  General minimum wage [Revised]

    2. Amend Sec.  4.159 by deleting the final sentence.
    3. Amend Sec.  4.167 by revising the twelfth sentence to the end, 
to read as follows:


Sec.  4.167  Wage payments--medium of payment.

    * * * The general rule under that Act provides, when determining 
the wage an employer is required to pay a tipped employee, the maximum 
allowable hourly tip credit is limited to the difference between $2.13 
and the applicable minimum wage specified in section 6(a)(1) of that 
Act. (See Sec.  4.163(k) for exceptions in section 4(c) situations.) In 
no event shall the sum credited as tips exceed the value of tips 
actually received by the employee. The tip credit is not available to 
an employer unless the employer has informed the employee of the tip 
credit provisions and all tips received by the employee have been 
retained by the employee (other than as part of a valid tip pooling 
arrangement among employees who customarily and regularly receive tips; 
see section 3(m) of the Fair Labor Standards Act).

PART 531--WAGE PAYMENTS UNDER THE FAIR LABOR STANDARDS ACT OF 1938

    4. The authority citation for part 531 is revised to read as 
follows:

    Authority: Sec. 3(m), 52 Stat. 1060; sec. 2, 75 Stat. 65; sec. 
101, 80 Stat. 830; sec. 29(B), 88 Stat. 55, Pub. L. 93-259; 29 
U.S.C. 203(m) and (t).


Sec.  531.7  [Removed and Reserved]

    5. Remove and reserve Sec.  531.7.
    6. Amend Sec.  531.30 by revising the second sentence to read as 
follows:


Sec.  531.30  ``Furnished'' to the employee.

    * * * Not only must the employee receive the benefits of the 
facility for which the employee is charged, but, with the exception of 
meals, the employee's acceptance of the facility must be voluntary and 
uncoerced. * * *
    7. Amend Sec.  531.36 by revising paragraph (a) to read as follows:


Sec.  531.36  Nonovertime workweeks.

    (a) When no overtime is worked by the employees, section 3(m) and 
this part apply only to the applicable minimum wage for all hours 
worked. To illustrate, where an employee works 40 hours a week at a 
cash wage rate of at least the applicable minimum wage and is paid that 
amount free and clear at the end of the workweek, and in addition is 
furnished facilities, no consideration need be given to the question of 
whether such facilities meet the requirements of section 3(m) and this 
part, since the employee has received in cash the applicable minimum 
wage for all hours worked. Similarly, where an employee is employed at 
a rate in excess of the

[[Page 43667]]

applicable minimum wage and during a particular workweek works 40 hours 
for which the employee receives at least the minimum wage free and 
clear, the employer having deducted from wages for facilities 
furnished, whether such deduction meets the requirement of section 3(m) 
and subpart B of this part need not be considered, since the employee 
is still receiving, after the deduction has been made, a cash wage of 
at least the minimum wage for each hour worked. Deductions for board, 
lodging, or other facilities may be made in nonovertime workweeks even 
if they reduce the cash wage below the minimum wage, provided the 
prices charged do not exceed the ``reasonable cost'' of such 
facilities. When such items are furnished the employee at a profit, the 
deductions from wages in weeks in which no overtime is worked are 
considered to be illegal only to the extent that the profit reduces the 
wage (which includes the ``reasonable cost'' of the facilities) below 
the required minimum wage. Facilities must be measured by the 
requirements of section 3(m) and this part to determine if the employee 
has received the applicable minimum wage in cash or in facilities which 
may be legitimately included in ``wages'' payable under the Act.
* * * * *
    8. Revise Sec.  531.37 to read as follows:


Sec.  531.37  Overtime workweeks.

    (a) Section 7 requires that the employee receive compensation for 
overtime hours at ``a rate of not less than one and one-half times the 
regular rate at which he is employed.'' When overtime is worked by an 
employee who receives the whole or part of his or her wage in 
facilities and it becomes necessary to determine the portion of wages 
represented by facilities, all such facilities must be measured by the 
requirements of section 3(m) and subpart B of this part. It is the 
Administrator's opinion that deductions may be made, however, on the 
same basis in an overtime workweek as in nonovertime workweeks (see 
Sec.  531.36), if their purpose and effect are not to evade the 
overtime requirements of the Act or other law, providing the amount 
deducted does not exceed the amount which could be deducted if the 
employee had only worked the maximum number of straight-time hours 
during the workweek. Deductions in excess of this amount for such 
articles as tools or other articles which are not ``facilities'' within 
the meaning of the Act are illegal in overtime workweeks as well as in 
nonovertime workweeks. There is no limit on the amount which may be 
deducted for ``board, lodging, or other facilities'' in overtime 
workweeks (as in workweeks when no overtime is worked), provided that 
these deductions are made only for the ``reasonable cost'' of the items 
furnished. These principles assume a situation where bona fide 
deductions are made for particular items in accordance with the 
agreement or understanding of the parties. If the situation is solely 
one of refusal or failure to pay the full amount of wages required by 
section 7, these principles have no application. Deductions made only 
in overtime workweeks, or increases in the prices charged for articles 
or services during overtime workweeks will be scrutinized to determine 
whether they are manipulations to evade the overtime requirements of 
the Act.
    (b) Where deductions are made from the stipulated wage of an 
employee, the regular rate of pay is arrived at on the basis of the 
stipulated wage before any deductions have been made. Where board, 
lodging, or other facilities are customarily furnished as addition to a 
cash wage, the reasonable cost of the facilities to the employer must 
be considered as part of the employee's regular rate of pay. See 
Walling v. Alaska Pacific Consolidated Mining Co., 152 F.2d 812 (9th 
Cir. 1945), cert. denied, 327 U.S. 803.
    9. Remove the undesignated center heading above Sec.  531.50.
    10. Designate Sec. Sec.  531.50 through 531.60 as subpart D, and 
add a heading for subpart D to read as follows:

Subpart D--Tipped Employees

    11. Revise Sec.  531.50 to read as follows:


Sec.  531.50  Statutory provisions with respect to tipped employees.

    (a) With respect to tipped employees, section 3(m) provides that, 
in determining the wage an employer is required to pay a tipped 
employee, the amount paid such employee by the employee's employer 
shall be an amount equal to--
    (1) The cash wage paid such employee which for purposes of such 
determination shall be not less than the cash wage required to be paid 
such an employee on August 20, 1996 [i.e., $2.13]; and
    (2) An additional amount on account of the tips received by such 
employee which amount is equal to the difference between the wage 
specified in paragraph (a)(1) of this section and the wage in effect 
under section 206(a)(1) of this title.
    (b) ``Tipped employee'' is defined in section 3(t) of the Act as 
follows: Tipped employee means any employee engaged in an occupation in 
which he customarily and regularly receives more than $30 a month in 
tips.
    12. Amend Sec. Sec.  531.51, 531.56, 531.57, 531.58 to remove and 
add terms as follows:


Sec. Sec.  531.51, 531.56, 531.57, 531.58  [Amended]

    In 29 CFR part 531, ``Wage Payments Under the Fair Labor Standards 
Act of 1938,'' remove the words ``$20'' and add, in their place, 
``$30'' wherever they appear in the following places:
    a. Section 531.51;
    b. Section 531.56 heading and paragraphs (a) through (e);
    c. Section 531.57; and
    d. Section 531.58.
    13. Amend Sec.  531.52 by revising the third, fourth and fifth 
sentences, to read as follows:


Sec.  531.52  General characteristics of ``tips.''

    * * * Whether a tip is to be given, and its amount, are matters 
determined solely by the customer, who has the right to determine who 
shall be the recipient of the gratuity. Where an employee is being paid 
wages no more than the minimum wage, the employer is prohibited from 
using an employee's tips for any reason other than to make up the 
difference between the required cash wage paid and the minimum wage or 
in furtherance of a valid tip pool. Only tips actually received by an 
employee as money belonging to the employee may be counted in 
determining whether the person is a ``tipped employee'' within the 
meaning of the Act and in applying the provisions of section 3(m) which 
govern wage credits for tips.
    14. Amend Sec.  531.54 by adding two sentences to the end of the 
paragraph to read as follows:


Sec.  531.54  Tip pooling.

    * * * Section 3(m) does not impose a maximum contribution 
percentage on tip pools. An employer must notify its employees of any 
required tip pool contribution amount.
    15. Revise Sec.  531.55 to read as follows:


Sec.  531.55  Examples of amounts not received as tips.

    (a) A compulsory charge for service, such as 15 percent of the 
amount of the bill, imposed on a customer by an employer's 
establishment, is not a tip and, even if distributed by the employer to 
its employees, cannot be counted as a tip received in applying the 
provisions of section 3(m) and 3(t). Similarly, where negotiations 
between a hotel and a customer for banquet facilities include amounts 
for distribution to employees of the hotel, the amounts so distributed 
are not counted as tips received.

[[Page 43668]]

    (b) As stated above, service charges and other similar sums which 
become part of the employer's gross receipts are not tips for the 
purposes of the Act. Where such sums are distributed by the employer to 
its employees, however, they may be used in their entirety to satisfy 
the monetary requirements of the Act.
    16. Amend Sec.  531.56 by revising the last sentence in paragraph 
(d) to read as follows:


Sec.  531.56  ``More than $30 per month in tips.''

* * * * *
    (d) Significance of minimum monthly tip receipts. * * * It does not 
govern or limit the determination of the appropriate amount of wage 
credit under section 3(m) that may be taken for tips under section 
6(a)(1) (tip credit equals the difference between the minimum wage 
required by section 6(a)(1) and $2.13 per hour).
* * * * *
    17. Revise Sec.  531.59 to read as follows:


Sec.  531.59  The tip wage credit.

    (a) In determining compliance with the wage payment requirements of 
the Act, under the provisions of section 3(m) the amount paid to a 
tipped employee by an employer is increased on account of tips by an 
amount equal to the formula set forth in the statute (minimum wage 
required by section 6(a)(1) of the Act minus $2.13), provided that the 
employer satisfies all the requirements of section 3(m). This tip 
credit is in addition to any credit for board, lodging, or other 
facilities which may be allowable under section 3(m).
    (b) As indicated in Sec.  531.51, the tip credit may be taken only 
for hours worked by the employee in an occupation in which the employee 
qualifies as a ``tipped employee.'' Pursuant to section 3(m), an 
employer is not eligible to take the tip credit unless it has informed 
its employees that it intends to avail itself of the tip wage credit. 
Such notice shall be provided in advance of the employer's use of the 
tip credit; the notice need not be in writing, but must communicate to 
employees that the employer intends to treat tips as satisfying part of 
the employer's minimum wage obligation. The credit allowed on account 
of tips may be less than that permitted by statute (minimum wage 
required by section 6(a)(1) minus $2.13); it cannot be more. In order 
for the employer to claim the maximum tip credit, the employer must 
demonstrate that the employee received at least that amount in actual 
tips. If the employee received less than the maximum tip credit amount 
in tips, the employer is required to pay the balance so that the 
employee receives at least the minimum wage with the defined 
combination of wages and tips. With the exception of tips contributed 
to a bona fide tip pool as described in Sec.  531.31, the tip credit 
provisions of section 3(m) also require employers to permit employees 
to retain all tips received by the employee.
    18. Amend Sec.  531.60 by removing the paragraph designation 
``(a)'' and revising the first and third sentences to read as follows:


Sec.  531.60  Overtime payments.

    When overtime is worked by a tipped employee who is subject to the 
overtime pay provisions of the Act, the employee's regular rate of pay 
is determined by dividing the employee's total remuneration for 
employment (except statutory exclusions) in any workweek by the total 
number of hours actually worked by the employee in that workweek for 
which such compensation was paid. * * * In accordance with section 
3(m), a tipped employee's regular rate of pay includes the amount of 
tip credit taken by the employer per hour (not in excess of the minimum 
wage required by section 6(a)(1) minus $2.13), the reasonable cost or 
fair value of any facilities furnished to the employee by the employer, 
as authorized under section 3(m) and this part 531, and the cash wages 
including commissions and certain bonuses paid by the employer. * * *
* * * * *

PART 553--APPLICATION OF THE FAIR LABOR STANDARDS ACT TO EMPLOYEES 
OF STATE AND LOCAL GOVERNMENTS

    19-20. The authority citation for part 553 continues to read as 
follows:

    Authority: Secs. 1-19 52 Stat. 1060, as amended (29 U.S.C. 201-
219); Pub. L. 99-150, 99 Stat. 787 (29 U.S.C. 203, 207, 211).

    21. Amend Sec.  553.25 by adding a sentence at the end of paragraph 
(c)(1) and by revising the last sentence of paragraph (d) to read as 
follows:


Sec.  553.25  Conditions for use of compensatory time (``reasonable 
period'', ``unduly disrupt'').

* * * * *
    (c) * * *
    (1) * * * Section 7(o)(5) does not require a public agency to allow 
an employee to use compensatory time on the specific day requested, but 
rather only requires the agency to permit an employee to use the time 
within a reasonable period after the employee makes the request, unless 
such use would unduly disrupt the agency's operations.
* * * * *
    (d) * * * For an agency to turn down a request from an employee for 
compensatory time off within a reasonable period after the request 
requires that it should reasonably and in good faith anticipate that it 
would impose an unreasonable burden on the agency's ability to provide 
services of acceptable quality and quantity for the public during the 
time off without the use of the employee's services.
    22. Revise Sec.  553.210(a) to read as follows:


Sec.  553.210  Fire protection activities.

    (a) As used in sections 7(k) and 13(b)(20) of the Act, the term 
``any employee * * * in fire protection activities'' refers to ``an 
employee, including a firefighter, paramedic, emergency medical 
technician, rescue worker, ambulance personnel, or hazardous materials 
worker, who is trained in fire suppression, has the legal authority and 
responsibility to engage in fire suppression, and is employed by a fire 
department of a municipality, county, fire district, or State; and is 
engaged in the prevention, control, and extinguishment of fires or 
response to emergency situations where life, property, or the 
environment is at risk.'' The term includes such incidental 
nonfirefighting functions as housekeeping, equipment maintenance, 
lecturing, attending community fire drills and inspecting homes and 
schools for fire hazards. The term would include all such employees, 
regardless of their status as ``trainee,'' ``probationary,'' or 
``permanent,'' or of their particular specialty or job title (e.g., 
firefighter, engineer, hose or ladder operator, fire specialist, fire 
inspector, lieutenant, captain, inspector, fire marshal, battalion 
chief, deputy chief, or chief), and regardless of their assignment to 
support activities of the type described in paragraph (c) of this 
section, whether or not such assignment is for training or 
familiarization purposes, or for reasons of illness, injury or 
infirmity.
* * * * *


Sec. Sec.  553.212 and 553.215  [Reserved]

    23. Remove and reserve Sec. Sec.  553.212 and 553.215.


Sec. Sec.  553.221, 553.222, 553.223, 553.226, and 553.231  [Amended]

    24. Amend Sec. Sec.  553.221, 553.222, 553.223, 553.226 and 553.231 
to remove and add terms as follows. Remove the words ``firefighter'' or 
``firefighters'' and add, in their place, the words ``employee in fire 
protection activities''

[[Page 43669]]

or ``employees in fire protection activities,'' respectively, wherever 
they appear in the following places:
    a. Section 553.221(a), (d), and (g);
    b. Section 553.222(a) and (c);
    c. Section 553.223(a), (c), and (d);
    d. Section 553.226(c); and
    e. Section 553.231(b).

PART 778--OVERTIME COMPENSATION

    25. The authority citation for part 778 continues to read as 
follows:

    Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201 et seq.

    26. Revise Sec.  778.110 to read as follows:


Sec.  778.110  Hourly rate employee.

    (a) Earnings at hourly rate exclusively. If the employee is 
employed solely on the basis of a single hourly rate, the hourly rate 
is the ``regular rate.'' For overtime hours of work the employee must 
be paid, in addition to the straight time hourly earnings, a sum 
determined by multiplying one-half the hourly rate by the number of 
hours worked in excess of 40 in the week. Thus a $12 hourly rate will 
bring, for an employee who works 46 hours, a total weekly wage of $588 
(46 hours at $12 plus 6 at $6). In other words, the employee is 
entitled to be paid an amount equal to $12 an hour for 40 hours and $18 
an hour for the 6 hours of overtime, or a total of $588.
    (b) Hourly rate and bonus. If the employee receives, in addition to 
the earnings computed at the $12 hourly rate, a production bonus of $46 
for the week, the regular hourly rate of pay is $13 an hour (46 hours 
at $12 yields $552; the addition of the $46 bonus makes a total of 
$598; this total divided by 46 hours yields a regular rate of $13). The 
employee is then entitled to be paid a total wage of $637 for 46 hours 
(46 hours at $13 plus 6 hours at $6.50, or 40 hours at $13 plus 6 hours 
at $19.50).
    27. Revise Sec.  778.111 to read as follows:


Sec.  778.111  Pieceworker.

    (a) Piece rates and supplements generally. When an employee is 
employed on a piece-rate basis, the regular hourly rate of pay is 
computed by adding together total earnings for the workweek from piece 
rates and all other sources (such as production bonuses) and any sums 
paid for waiting time or other hours worked (except statutory 
exclusions). This sum is then divided by the number of hours worked in 
the week for which such compensation was paid, to yield the 
pieceworker's ``regular rate'' for that week. For overtime work the 
pieceworker is entitled to be paid, in addition to the total weekly 
earnings at this regular rate for all hours worked, a sum equivalent to 
one-half this regular rate of pay multiplied by the number of hours 
worked in excess of 40 in the week. (For an alternative method of 
complying with the overtime requirements of the Act as far as 
pieceworkers are concerned, see Sec.  778.418.) Only additional half-
time pay is required in such cases where the employee has already 
received straight-time compensation at piece rates or by supplementary 
payments for all hours worked. Thus, for example, if the employee has 
worked 50 hours and has earned $491 at piece rates for 46 hours of 
productive work and in addition has been compensated at $8.00 an hour 
for 4 hours of waiting time, the total compensation, $523.00, must be 
divided by the total hours of work, 50, to arrive at the regular hourly 
rate of pay--$10.46. For the 10 hours of overtime the employee is 
entitled to additional compensation of $52.30 (10 hours at $5.23). For 
the week's work the employee is thus entitled to a total of $575.30 
(which is equivalent to 40 hours at $10.46 plus 10 overtime hours at 
$15.69).
    (b) Piece rates with minimum hourly guarantee. In some cases an 
employee is hired on a piece-rate basis coupled with a minimum hourly 
guaranty. Where the total piece-rate earnings for the workweek fall 
short of the amount that would be earned for the total hours of work at 
the guaranteed rate, the employee is paid the difference. In such weeks 
the employee is in fact paid at an hourly rate and the minimum hourly 
guaranty is the regular rate in that week. In the example just given, 
if the employee was guaranteed $11 an hour for productive working time, 
the employee would be paid $506 (46 hours at $11) for the 46 hours of 
productive work (instead of the $491 earned at piece rates). In a week 
in which no waiting time was involved, the employee would be owed an 
additional $5.50 (half time) for each of the 6 overtime hours worked, 
to bring the total compensation up to $539 (46 hours at $11 plus 6 
hours at $5.50 or 40 hours at $11 plus 6 hours at $16.50). If the 
employee is paid at a different rate for waiting time, the regular rate 
is the weighted average of the 2 hourly rates, as discussed in Sec.  
778.115.
    28. Amend Sec.  778.113 by revising paragraph (a) and the fifth 
sentence of paragraph (b) to read as follows:


Sec.  778.113  Salaried employees--general.

    (a) Weekly salary. If the employee is employed solely on a weekly 
salary basis, the regular hourly rate of pay, on which time and a half 
must be paid, is computed by dividing the salary by the number of hours 
which the salary is intended to compensate. If an employee is hired at 
a salary of $350 and if it is understood that this salary is 
compensation for a regular workweek of 35 hours, the employee's regular 
rate of pay is $350 divided by 35 hours, or $10 an hour, and when the 
employee works overtime the employee is entitled to receive $10 for 
each of the first 40 hours and $15 (one and one-half times $10) for 
each hour thereafter. If an employee is hired at a salary of $375 for a 
40-hour week the regular rate is $9.38 an hour.
    (b) * * * The regular rate of an employee who is paid a regular 
monthly salary of $1,560, or a regular semimonthly salary of $780 for 
40 hours a week, is thus found to be $9 per hour. * * *
    29. Revise Sec.  778.114 to read as follows:


Sec.  778.114  Fixed salary for fluctuating hours.

    (a) An employee employed on a salary basis may have hours of work 
that fluctuate from week to week and be paid the salary amount pursuant 
to an understanding with the employer that the employee will receive 
such fixed amount as straight time pay for whatever hours the employee 
is called upon to work in a workweek, whether few or many. Where there 
is a clear mutual understanding of the parties that the fixed salary is 
compensation for the total hours worked each workweek, whatever their 
number, rather than for working 40 hours or some other fixed weekly 
work period, such a salary arrangement is permitted by the Act if the 
amount of the salary and any bonus or premium payments not excluded 
from the regular rate under section 7(e)(1) through (8) of the Act is 
sufficient to provide compensation to the employee at a rate not less 
than the applicable minimum wage rate for every hour worked in those 
workweeks in which the number of hours the employee works is greatest, 
and if the employee receives extra compensation, in addition to such 
salary, for all overtime hours worked at a rate not less than one-half 
the employee's regular rate of pay. Since the salary in such a 
situation is intended to compensate the employee at straight time rates 
for whatever hours are worked in the workweek, the regular rate of the 
employee will vary from week to week and is determined by dividing the 
number of hours worked in the workweek into the amount of the salary 
and any non-excludable bonus or

[[Page 43670]]

premium payments to obtain the applicable hourly rate for the week. 
Payment for overtime hours at one-half such rate in addition to the 
salary, bonus and premium payments satisfies the overtime pay 
requirement because such hours have already been compensated at the 
straight time regular rate. Payment of overtime premiums and other 
bonus and non-overtime premium payments will not invalidate the 
``fluctuating workweek'' method of overtime payment, but such payments 
must be included in the calculation of the regular rate unless excluded 
under section 7(e)(1) through (8) of the Act.
    (b)(1) The application of the principles above stated may be 
illustrated by the case of an employee whose hours of work do not 
customarily follow a regular schedule but vary from week to week, whose 
overtime work is never in excess of 50 hours in a workweek, and whose 
salary of $600 a week is paid with the understanding that it 
constitutes the employee's straight time compensation for whatever 
hours are worked in the workweek. If during the course of 4 weeks this 
employee works 40, 44, 50, and 48 hours, the regular hourly rate of pay 
in each of these weeks is approximately $15.00, $13.64, $12.00, and 
$12.50, respectively. Since the employee has already received straight-
time compensation on a salary basis for all hours worked in these 
examples, only additional half-time pay is due. For the first week the 
employee is entitled to be paid $600; for the second week $627.28 ($600 
plus 4 hours at $6.82, or 40 hours at $13.64 plus 4 hours at $20.46); 
for the third week $660 ($600 plus 10 hours at $6.00, or 40 hours at 
$12.00 plus 10 hours at $18.00); for the fourth week approximately $650 
($600 plus 8 hours at $6.25 or 40 hours at $12.50 plus 8 hours at 
$18.75).
    (2) If, in each week in the examples in paragraph (b)(1) of this 
section, 4 of the hours the employee worked were nightshift hours 
compensated at a premium rate of an extra $5.00 per hour, the 
employee's total compensation would be calculated as follows: For the 
first week the employee is entitled to be paid $620 (salary 
compensation of $600 plus $20.00 of non-overtime premium pay, with no 
overtime hours); for the second week $648.20 (salary compensation of 
$600 plus $20.00 of non-overtime premium pay, with a regular rate of 
$14.09 and four hours of overtime at $7.05 for a total overtime payment 
of $28.20); for the third week $682.00 (salary compensation of $600 
plus $20.00 of non-overtime premium pay, with a regular rate of $12.40 
and ten hours of overtime at $6.20 for a total overtime payment of 
$62.00); for the fourth week $671.68 (salary compensation of $600 plus 
$20.00 of non-overtime premium pay, with a regular rate of $12.92 and 
eight hours of overtime at $6.46 for a total overtime payment of 
$51.68).
    (c) The ``fluctuating workweek'' method of overtime payment may not 
be used unless the amount of the salary plus any bonus or premium 
payments not excluded from the regular rate under section 7(e)(1) 
through (8) of the Act is sufficiently large to assure that no workweek 
will be worked in which the employee's average hourly earnings fall 
below the minimum hourly wage rate applicable under the Act, and unless 
the employee clearly understands that the salary amount covers all the 
hours worked in the workweek, whether few or many, and the employer 
pays the salary amount even though the workweek is one in which a full 
schedule of hours is not worked. Typically, such salaries are paid to 
employees who do not customarily work a regular schedule of hours and 
are in amounts agreed on by the parties as adequate straight-time 
compensation for long workweeks as well as short ones, under the 
circumstances of the employment as a whole. Where all the legal 
prerequisites for use of the ``fluctuating workweek'' method of 
overtime payment are present, the Act, in requiring that ``not less 
than'' the prescribed premium of 50 percent for overtime hours worked 
be paid, does not prohibit paying more. On the other hand, where all 
the facts indicate that an employee is being paid for overtime hours at 
a rate no greater than that which the employee receives for non-
overtime hours, compliance with the Act cannot be rested on any 
application of the fluctuating workweek overtime formula.
    30. Amend Sec.  778.200 by adding paragraph (a) (8) and revising 
paragraph (b) to read as follows:


Sec.  778.200  Provisions governing inclusion, exclusion, and crediting 
of particular payments.

    (a) * * *
    (8) Any value or income derived from employer-provided grants or 
rights provided pursuant to a stock option, stock appreciation right, 
or bona fide employee stock purchase program which is not otherwise 
excludable under any of paragraphs (1) through (7) if--
    (i) Grants are made pursuant to a program, the terms and conditions 
of which are communicated to participating employees either at the 
beginning of the employee's participation in the program or at the time 
of the grant;
    (ii) In the case of stock options and stock appreciation rights, 
the grant or right cannot be exercisable for a period of at least 6 
months after the time of grant (except that grants or rights may become 
exercisable because of an employee's death, disability, retirement, or 
a change in corporate ownership, or other circumstances permitted by 
regulation), and the exercise price is at least 85 percent of the fair 
market value of the stock at the time of grant;
    (iii) Exercise of any grant or right is voluntary; and
    (iv) Any determinations regarding the award of, and the amount of, 
employer-provided grants or rights that are based on performance are--
    (A) Made based upon meeting previously established performance 
criteria (which may include hours of work, efficiency, or productivity) 
of any business unit consisting of at least 10 employees or of a 
facility, except that any determinations may be based on length of 
service or minimum schedule of hours or days of work; or
    (B) Made based upon the past performance (which may include any 
criteria) of one or more employees in a given period so long as the 
determination is in the sole discretion of the employer and not 
pursuant to any prior contract.
    (b) Section 7(h). This subsection of the Act provides as follows:
    (1) Except as provided in paragraph (2), sums excluded from the 
regular rate pursuant to subsection (e) shall not be creditable toward 
wages required under section 6 or overtime compensation required under 
this section.
    (2) Extra compensation paid as described in paragraphs (5), (6), 
and (7) of subsection (e) of this section shall be creditable toward 
overtime compensation payable pursuant to this section.
* * * * *
    31. Amend Sec.  778.208 by revising the first sentence to read as 
follows:


Sec.  778.208  Inclusion and exclusion of bonuses in computing the 
``regular rate.''

    Section 7(e) of the Act requires the inclusion in the regular rate 
of all remuneration for employment except eight specified types of 
payments. * * *

PART 779--THE FAIR LABOR STANDARDS ACT AS APPLIED TO RETAILERS OF 
GOODS OR SERVICES

    32-33. The authority citation for part 779 is revised to read as 
follows:

    Authority: Secs. 1-19, 52 Stat. 1060, as amended; 75 Stat. 65; 
Sec. 29(B), Pub. L. 93-259, 88 Stat. 55; 29 U.S.C. 201-219.


[[Page 43671]]


    34. Revise the undesignated center heading for Sec. Sec.  779.371 
and 779.372 to read as follows:

Automobile, Truck and Farm Implement Sales and Services, and Trailer, 
Boat and Aircraft Sales

    35. Amend Sec.  779.371 by revising the fifth sentence of paragraph 
(a) to read as follows:


Sec.  779.371  Some automobile, truck, and farm implement 
establishments may qualify for exemption under section 13(a)(2).

    (a) * * * Section 13(b)(10) is applicable not only to automobile, 
truck, and farm implement dealers but also to dealers in trailers, 
boats, and aircraft. * * *
* * * * *
    36. Amend Sec.  779.372 by revising paragraphs (a), (b)(1)(ii), 
(b)(2), and (c) to read as follows:


Sec.  779.372  Nonmanufacturing establishments with certain exempt 
employees under section 13(b)(10).

    (a) General. A specific exemption from only the overtime pay 
provisions of section 7 of the Act is provided in section 13(b)(10) for 
certain employees of nonmanufacturing establishments engaged in the 
business of selling automobiles, trucks, farm implements, trailers, 
boats, or aircraft. Section 13(b)(10)(A) states that the provisions of 
section 7 shall not apply with respect to ``any salesman, partsman, or 
mechanic primarily engaged in selling or servicing automobiles, trucks, 
or farm implements, if he is employed by a nonmanufacturing 
establishment primarily engaged in the business of selling such 
vehicles or implements to ultimate purchasers.'' Section 13(b)(10)(B) 
states that the provisions of section 7 shall not apply with respect to 
``any salesman primarily engaged in selling trailers, boats, or 
aircraft, if he is employed by a nonmanufacturing establishment 
primarily engaged in the business of selling trailers, boats, or 
aircraft to ultimate purchasers.'' This exemption will apply 
irrespective of the annual dollar volume of sales of the establishment 
or of the enterprise of which it is a part.
    (b) * * *
    (1) * * *
    (ii) The establishment must be primarily engaged in the business of 
selling automobiles, trucks, or farm implements to the ultimate 
purchaser for section 13(b)(10)(A) to apply. If these tests are met by 
an establishment the exemption will be available for salesmen, partsmen 
and mechanics, employed by the establishment, who are primarily engaged 
during the work week in the selling or servicing of the named items. 
Likewise, the establishment must be primarily engaged in the business 
of selling trailers, boats, or aircraft to the ultimate purchaser for 
the section 13(b)(10)(B) exemption to be available for salesmen 
employed by the establishment who are primarily engaged during the work 
week in selling these named items. An explanation of the term 
``employed by'' is contained in Sec. Sec.  779.307 through 779.311. The 
exemption is intended to apply to employment by such an establishment 
of the specified categories of employees even if they work in 
physically separate buildings or areas, or even if, though working in 
the principal building of the dealership, their work relates to the 
work of physically separate buildings or areas, so long as they are 
employed in a department which is functionally operated as part of the 
dealership.
    (2) This exemption, unlike the former exemption in section 
13(a)(19) of the Act prior to the 1966 amendments, is not limited to 
dealerships that qualify as retail or service establishments nor is it 
limited to establishments selling automobiles, trucks, and farm 
implements, but also includes dealers in trailers, boats, and aircraft.
    (c) Salesman, partsman, or mechanic.
    (1) As used in section 13(b)(10)(A), a salesman is an employee who 
is employed for the purpose of and is primarily engaged in making sales 
or obtaining orders or contracts for sale or servicing of the 
automobiles, trucks, or farm implements that the establishment is 
primarily engaged in selling. As used in section 13(b)(10)(B), a 
salesman is an employee who is employed for the purpose of and is 
primarily engaged in making sales or obtaining orders or contracts for 
sale of trailers, boats, or aircraft that the establishment is 
primarily engaged in selling. Work performed incidental to and in 
conjunction with the employee's own sales or solicitations, including 
incidental deliveries and collections, is regarded as within the 
exemption.
    (2) As used in section 13(b)(10)(A), a partsman is any employee 
employed for the purpose of and primarily engaged in requisitioning, 
stocking, and dispensing parts.
    (3) As used in section 13(b)(10)(A), a mechanic is any employee 
primarily engaged in doing mechanical work (such as get ready 
mechanics, automotive, truck, or farm implement mechanics, used car 
reconditioning mechanics, and wrecker mechanics) in the servicing of an 
automobile, truck or farm implement for its use and operation as such. 
This includes mechanical work required for safe operation, as an 
automobile, truck, or farm implement. The term does not include 
employees primarily performing such nonmechanical work as washing, 
cleaning, painting, polishing, tire changing, installing seat covers, 
dispatching, lubricating, or other nonmechanical work. Wrecker mechanic 
means a service department mechanic who goes out on a tow or wrecking 
truck to perform mechanical servicing or repairing of a customer's 
vehicle away from the shop, or to bring the vehicle back to the shop 
for repair service. A tow or wrecker truck driver or helper who 
primarily performs nonmechanical repair work is not exempt.
    (4) Employees variously described as service manager, service 
writer, service advisor, or service salesman, who are primarily engaged 
in obtaining orders for servicing of automobiles, trucks, or farm 
implements that the establishment is primarily engaged in selling, are 
exempt under section 13(b)(10)(A). Such employees typically perform 
duties such as greeting customers and obtaining information regarding 
their service or repair concerns; diagnosing the mechanical condition 
of the automobile, truck, or farm implement brought in for repair; 
offering and attempting to sell appropriate diagnostic or repair 
services; providing estimates for the recommended services or repairs; 
writing up orders for work authorized by the customer; assigning the 
work to various employees; directing and checking on the work of 
mechanics; and communicating with customers regarding the status of 
their vehicles.
* * * * *

PART 780--EXEMPTIONS APPLICABLE TO AGRICULTURE, PROCESSING OF 
AGRICULTURAL COMMODITIES, AND RELATED SUBJECTS UNDER THE FAIR LABOR 
STANDARDS ACT

    37-38. The authority citation for part 780 continues to read as 
follows:

    Authority: Secs. 1-19, 52 Stat. 1060, as amended; 75 Stat. 65; 
29 U.S.C. 201-219.

    39. Revise Sec.  780.400 to read as follows:


Sec.  780.400  Statutory provisions.

    Section 13(b)(12) of the Fair Labor Standards Act exempts from the 
overtime provisions of section 7 any employee employed in agriculture 
or in connection with the operation or maintenance of ditches, canals, 
reservoirs, or waterways, not owned or operated for profit, or operated 
on a sharecrop basis, and which are used

[[Page 43672]]

exclusively for supply and storing of water, at least 90 percent of 
which was ultimately delivered for agricultural purposes during the 
preceding calendar year.
    40. Amend Sec.  780.401 by revising the first sentence of paragraph 
(a) and all of paragraph (b) to read as follows:


Sec.  780.401  General explanatory statement.

    (a) Section 13(b)(12) of the Act contains the same wording 
exempting any employee employed in agriculture as did section 13(a)(6) 
prior to the 1966 amendments. * * *
    (b) In addition to exempting employees engaged in agriculture, 
section 13(b)(12) also exempts from the overtime provisions of the Act 
employees employed in specified irrigation activities. The effect of 
the 1997 amendment to section 13(b)(12) is to expand the overtime 
exemption for any employee employed in specified irrigation activities 
used for supply and storing of water for agricultural purposes by 
substituting ``water, at least 90 percent of which was ultimately 
delivered for agricultural purposes during the preceding calendar 
year'' for the prior requirement that all the water be used for 
agricultural purposes. Prior to the 1966 amendments employees employed 
in specified irrigation activities were exempt from the minimum wage 
and overtime pay requirements of the Act.
* * * * *
    41. Revise Sec.  780.406 to read as follows:


Sec.  780.406  Exemption is from overtime only.

    This exemption applies only to the overtime provisions of the Act 
and does not affect the minimum wage, child labor, recordkeeping, and 
other requirements of the Act.
    42. Amend Sec.  780.408 by revising the section heading and the 
first four sentences of the paragraph to read as follows:


Sec.  780.408  Facilities of system at least 90 percent of which was 
used for agricultural purposes.

    Section 13(b)(12) requires for exemption of irrigation work that 
the ditches, canals, reservoirs, or waterways in connection with which 
the employee's work is done be ``used exclusively for supply and 
storing of water at least 90 percent of which was ultimately delivered 
for agricultural purposes during the preceding calendar year.'' If a 
water supplier supplies water of which more than 10 percent is used for 
purposes other than ``agricultural purposes'' during the preceding 
calendar year, the exemption would not apply. For example, the 
exemption would not apply where more than 10 percent of the water 
supplier's water is delivered to a municipality to be used for general, 
domestic, and commercial purposes. The fact that a small amount of the 
water furnished for use in farming operations is in fact used for 
incidental purposes by the farmer on the farm does not, however, 
require the conclusion that such water was not ultimately delivered for 
agricultural purposes within the meaning of the irrigation exemption in 
section 13(b)(12). * * *

PART 785--HOURS WORKED

    43. The authority citation for part 785 is revised to read as 
follows:

    Authority: 52 Stat. 1060; 29 U.S.C. 201-219; 29 U.S.C. 254.

    44. Amend Sec.  785.9 by adding a sentence after the third sentence 
in paragraph (a) to read as follows:


Sec.  785.9  Statutory exemptions.

    (a) * * * The use of an employer's vehicle for travel by an 
employee and activities that are incidental to the use of such vehicle 
for commuting are not considered ``principal'' activities when meeting 
the following conditions: The use of the employer's vehicle for travel 
is within the normal commuting area for the employer's business or 
establishment and the use of the employer's vehicle is subject to an 
agreement on the part of the employer and the employee or the 
representative of such employee. * * *
    45. Amend Sec.  785.34 by adding a sentence after the first 
sentence to read as follows:


Sec.  785.34  Effect of section 4 of the Portal-to-Portal Act.

    * * * Section 4(a) further provides that the use of an employer's 
vehicle for travel by an employee and activities that are incidental to 
the use of such vehicle for commuting are not considered principal 
activities when the use of such vehicle is within the normal commuting 
area for the employer's business or establishment and is subject to an 
agreement on the part of the employer and the employee or the 
representative of such employee. * * *
    46. Amend Sec.  785.50 by adding a sentence at the end of paragraph 
(a)(2) to read as follows:


Sec.  785.50  Section 4 of the Portal-to-Portal Act.

* * * * *
    (a) * * *
    (2) * * * For purposes of this subsection, the use of an employer's 
vehicle for travel by an employee and activities performed by an 
employee which are incidental to the use of such vehicle for commuting 
shall not be considered part of the employee's principal activities if 
the use of such vehicle for travel is within the normal commuting area 
for the employer's business or establishment and the use of the 
employer's vehicle is subject to an agreement on the part of the 
employer and the employee or representative of such employee.
* * * * *

PART 786--MISCELLANEOUS EXEMPTIONS AND EXCLUSIONS FROM COVERAGE

    47. The authority citation for part 786 continues to read as 
follows:

    Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201-219.

    48. Revise the heading of part 786 to read as set forth above.
    49. Add subpart G consisting of Sec.  786.300 to read as follows:

Subpart G--Youth Opportunity Wage


Sec.  786.300  Application of the youth opportunity wage.

    Section 6(g) of the Fair Labor Standards Act allows any employer to 
pay any employee who has not attained the age of 20 years a wage of not 
less than $4.25 an hour during the first 90 consecutive calendar days 
after such employee is initially employed by such employer. For the 
purposes of hiring workers at this wage, no employer may take any 
action to displace employees, including partial displacements such as 
reducing hours, wages, or employment benefits. Any employer that 
violates these provisions is considered to have violated section 
15(a)(3) of the Act.
    50. Add subpart H consisting of Sec.  786.350 to read as follows:

Subpart H--Volunteers at Private Non-Profit Food Banks


Sec.  786.350  Exclusion from definition of ``employee'' of volunteers 
at private non-profit food banks.

    Section 3(e)(5) of the Fair Labor Standards Act excludes from the 
definition of the term ``employee'' individuals who volunteer their 
services solely for humanitarian purposes at private non-profit food 
banks and who receive groceries from the food banks.

[[Page 43673]]

PART 790--GENERAL STATEMENT AS TO THE EFFECT OF THE PORTAL-TO-
PORTAL ACT OF 1947 ON THE FAIR LABOR STANDARDS ACT OF 1938

    51. The authority citation for part 790 is revised to read as 
follows:

    Authority: 52 Stat. 1060, as amended; 100 Stat. 1755; 29 U.S.C. 
201-219; 29 U.S.C. 254.

    52. Amend Sec.  790.3 by adding a sentence at the end of paragraph 
(a)(2) to read as follows:


Sec.  790.3  Provisions of the statute.

* * * * *
    (a) * * *
    (2) * * * For purposes of this subsection, the use of an employer's 
vehicle for travel by an employee and activities performed by an 
employee which are incidental to the use of such vehicle for commuting 
shall not be considered part of the employee's principal activities if 
the use of such vehicle for travel is within the normal commuting area 
for the employer's business or establishment and the use of the 
employer's vehicle is subject to an agreement on the part of the 
employer and the employee or representative of such employee.
* * * * *
 [FR Doc. E8-16631 Filed 7-25-08; 8:45 am]
BILLING CODE 4510-27-P