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NELA Submits Comments To The DOL Regarding Exemptions To Overtime Protections

 

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September 25, 2017

Submitted via http://www.regulations.gov

Melissa Smith
Director of the Division of Regulations,Legislation, and Interpretation
Wage and Hour Division
Room S-3502
200 Constitution Avenue, N.W.
Washington, D.C. 20210

Re: NELA Comments to Request For Information (RFI); Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales Computer Exemptions; 29 C.F.R. Part 541; RIN 1235-AA20

Dear Melissa Smith:

The National Employment Lawyers Association (NELA) is grateful for the opportunity to provide the Department of Labor (“DOL” or “Department”) with its views in response to the DOL’s RFI regarding 29 C.F.R. Part 541, which defines and delimits exemptions from the Fair Labor Standards Act (FLSA) for certain executive, administrative, professional, outside sales, and computer employees (the “white collar” or “EAP” exemptions).

NELA is well qualified to comment on the issues identified in the RFI because it is the largest professional membership organization in the country comprising lawyers who represent workers in labor, employment, and civil rights disputes. Founded in 1985, NELA advances employee rights and serves lawyers who advocate for equality and justice in the American workplace. NELA and its 69 circuit, state, and local affiliates have a membership of over 4,000 attorneys who are committed to working on behalf of those who have been treated illegally in the workplace. NELA members litigate daily in every federal circuit, which provides NELA with a unique perspective on how these issues actually will play out on the ground.

NELA members represent thousands of individuals in this country who are subjected to employer violations of the wage and hour laws. NELA members are committed to advocating for a narrow interpretation of the exemptions under the FLSA, so as to reduce the number of workers who are exempt from the protection of the overtime rules. These workers comprise a disproportionate and growing share of the workforce, and are harmed by the erosion of the right to overtime pay. In submitting these comments, NELA seeks to protect the rights of its members’ clients, by ensuring that the goals of the FLSA are fully realized.

These comments were drafted by members of NELA’s Wage and Hour Committee, who have been involved in wage and hour litigation for decades and are intimately familiar with the current regulations. These comments should be viewed not as the comments of a single committee or subset of NELA members, but as a distillation of the views of the 4,000 members of NELA who represent working people.

We are disappointed by the Department’s failure to more aggressively defend and implement the 2016 Final Rule, as well as by the poorly reasoned and erroneous decision of the Texas District Court purporting to strike down the 2016 Final Rule. Nevada, et al. v U.S. Dep’t of Labor, et al., No. 4:16-CV-731, 2017 WL 3837230 (E.D. Tex. Aug. 31, 2017) (S.J. Order). We believe the Department properly propounded the 2016 Final Rule after carefully reviewing and considering an extensive administrative record containing over 293,000 comments. The 2016 Final Rule faithfully adhered to the underlying Congressional intent and was consistent with the Department’s longstanding enforcement policies and regulatory issuances pertaining to the EAP exemptions. While NELA advocated a more robust increase to the required salary level in 2015, the 2016 Final Rule was a strong step in the right direction. It provided a long overdue and necessary increase to the standard salary level to qualify for EAP exemptions and implemented automatic updating of the salary levels every three years to ensure that they will not again become historically outdated. The salary level set by the 2016 Final Rule was consistent with the salary levels the Department had issued and enforced for the last 80 years––indeed it was effectively lower than the salary level set by the Department in 1975. (If the 1975 short test salary threshold were adjusted for 2013 dollars, it would result in salary level of $1,083 per week.) See 80 Fed. Reg. 38,516, 38,533 (July 6, 2015).

The Department’s failure to defend the 2016 Final Rule vigorously and to indicate immediately that it would be appealing Judge Mazzant’s rulings in Nevada, et al. v U.S. Dep’t of Labor, et al. represents an abdication of its mission and is irreconcilable with eight decades of regulatory history, during which the Department issued and enforced comparable salary tests as a necessary and fundamental requirement for establishing the EAP exemptions.

NELA’s position is that there must be a substantial increase in the salary levels required to qualify for the EAP exemptions, along with regular automatic updates to those salary levels, in order to ensure that the salary level maintains an effective line of demarcation between those workers who legitimately should be exempt and those who are entitled to the overtime protections of the FLSA.

NELA is concerned with the tenor of the Department’s RFI, which seems to suggest the possibility of fundamental changes that would depart from the historical positions and promulgations of the Department and would fail to carry out the Congressional intent underlying the FLSA. NELA submits these comments to urge the Department to make sure that any proposed regulations are consistent with the historical mission of the DOL and effectively carry out the purposes of the FLSA.

 
The Department Must Appeal the Flawed Ruling
in Nevada, et al., v. U.S. Dep’t of Labor, et al.

NELA calls on the Department to defend its administrative authority over the FLSA and contest the legal challenges to its properly-promulgated 2016 Final Rule more strenuously.

In Nevada, et al., v. U.S. Dep’t of Labor, et al., 218 F. Supp. 3d 520 (E.D. Tex. Nov. 22, 2016) (P.I. Order), Judge Mazzant issued a preliminary injunction enjoining the DOL from enforcing the Rule and purporting to preliminarily enjoin the 2016 Final Rule on a nationwide basis. In that ruling, Judge Mazzant concluded that “29 U.S.C. § 213(a)(1) does not grant the Department the authority to utilize a salary-level test.” More recently, after the Department issued its Request for Information, the Nevada court granted summary judgment to the parties challenging the Final Rule. See S.J. Order. The court held that the Final Rule’s salary level exceeded the Department’s authority, and concluded that the Final Rule is invalid.1

Judge Mazzant’s preliminary injunction order stated that the Department cannot utilize a salary test to delimit the EAP exemptions. P.I. Order, 218 F. Supp. 3d at 534. The court’s later summary judgment ruling walks back from this point, acknowledging that “its injunction order might have been confusing” on this point (S.J. Order at *2, fn.1) and stating that: “This opinion is not making any assessments regarding the general lawfulness of the salary-level test or the Department’s authority to implement such a test. Instead, the Court is evaluating only the salary-level test as amended by the Department’s Final Rule . . .” Id. at *7. Thus, the summary judgment order recognizes that that increasing the salary level is lawful, but nevertheless finds the 2016 Final Rule invalid because the salary level it set was too high.2 Judge Mazzant fails to articulate any principled criteria delimiting the DOL’s authority to raise the salary level.

Judge Mazzant’s ruling is a results-driven order which invalidates the legitimately-promulgated 2016 Final Rule solely because he thought the salary level set by the DOL was too high. Judge Mazzant disregards the regulatory, judicial, and Congressional history establishing that the Department has broad authority to define and delimit who is “employed in a bona fide executive, administrative or professional capacity.” For example, the U.S. Supreme Court has recognized that “[t]he FLSA grants the Secretary broad authority to ‘define[e] and delimit[t] the scope of the exemption for executive, administrative, and professional employees.’” Auer v. Robbins, 519 U.S. 452, 456 (1997). The court also fails to acknowledge the well-established rule that the EAP exemptions can only be satisfied where each of the tests for the exemption––the salary basis test, the salary threshold, and the duties tests—are all satisfied. See 29 C.F.R. § 541.2

The salary level test always has been an independent and separate prong of the test for establishing the EAP exemptions. The DOL consistently has recognized that the terms “bona fide executive, administrative and professional” imply a certain prestige, status and importance, and the employee’s salary serves as one mark of her status in management or the professions. Over the years, the Department has made it clear that the standard salary threshold is an indispensable bright-line test that gives meaning to the “bona fide” language of the EAP exemption. As the Department noted in 1940, “[t]he final and most effective check on the validity of the claim for exemption is the payment of a salary commensurate with the importance supposedly accorded the duties in question.”3 The DOL early on recognized that “a salary criterion constitutes the best and most easily applied test of the employer’s good faith in claiming that the person whose exemption is desired is actually of such importance to the firm that he is properly describable as an employee employed in a bona fide administrative capacity” and the salary figure must be set “high enough to prevent abuse.”4

The DOL has historically and repeatedly updated the salary test to make sure that only appropriately high level employees will be exempted from the overtime protections of the FLSA.5 Judge Mazzant’s decision fails to recognize the long established principle that the salary threshold would exclude workers from the EAP exemption even if they would otherwise pass the duties test. See 29 C.F.R. § 541.26 The decision also ignores the relationship between the salary level test and the concept of being employed in a “bona fide” EAP position. Judge Mazzant’s analysis focuses solely on the requirement that EAP duties be performed and not the broader role Congress asked the Department to undertake––to define and delimit who is “employed in a bona fide executive, administrative, or professional capacity.” 29 U.S.C. § 213(a)(1). See Auer, 519 U.S. at 456.

Judge Mazzant should have recognized that setting a salary level is inextricably intertwined with the very role that Congress delegated to the Department––defining and delimiting what it means to work in a “bona fide” executive, administrative, or professional capacity. Raising the salary level, whether just for inflation (which the district court suggests is acceptable) or to meet a different standard determined by the Department, always impacts the determination of those who are in “bona fide” EAP positions.7 Such determinations are within the discretionary authority that Congress delegated to the Department. Judge Mazzant’s ruling fails to consider the regulatory history or the underlying administrative record that the DOL carefully compiled and reviewed before promulgating the 2016 Final Rule.

Judge Mazzant’s rulings are problematic for the Department on several levels, and it is incumbent on the Department to seek appellate review to the highest level. The effect of the opinion is to disregard the Department’s expertise and authority, overturning a valid exercise of rulemaking which Congress specifically delegated to the Department. The Department, and every Executive Branch agency no matter which party is in power, has a vested interest in being able to carry out legislative rulemaking through the notice and comment procedures of the Administrative Procedure Act. Had the court determined that the Department set the salary level in some arbitrary manner by ignoring the salary level information before it, perhaps the Department could be charged with abandoning its responsibility. But as the Supreme Court recognized in Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 165 (2007), where Congress left gaps in the FLSA and delegated to the Department the authority to fill those gaps, “then a court ordinarily assumes that Congress intended it to defer to the agency’s determination.” Id. at 173-74. Judge Mazzant ignored this precedent and acted contrary to it.

The S.J. Order is a results-driven opinion that reflects a clear hostility to workers’ rights and will allow businesses to profit from watered-down delimitations on the EAP exemptions. NELA calls on U.S. Secretary of Labor Alexander Acosta to honor President Trump’s repeated promises to stand up for working people across this country, abide by the DOL’s mission to “foster, promote and develop the welfare of the wage earners, job seekers and retirees of the United States,” and appeal this decision immediately.

 
QUESTION NO. 1

In 2004 the Department set the standard salary level at $455 per week. Would updating the 2004 salary level for inflation be an appropriate basis for setting the salary level? Alternatively, would applying the 2004 methodology to current salary data (South and retail) be an appropriate basis for setting the salary level? Would resetting the salary level require changes to the standard duties test?

Short Answer:
NELA recommends that the Department adopt a threshold reflecting the 50th earnings percentile of fulltime salaried workers rather than using the 2004 salary level as a starting point. A significant increase in qualifying salary is necessary not only to account for the declining real value of the existing salary threshold, but also to correct for the fact that the Department set the standard salary level in 2004 without adjusting for the elimination of the more rigorous long duties test.

Full Answer:
The $455 per week salary level that the Department set in 2004 is not an appropriate starting point for setting the current salary level because, as the Department recognized just last year, that salary level was too low as a result of the elimination of the “long” duties test and in relation to increases the Department has historically made to the salary level.

Returning to the long/short duties test is not the solution. Stakeholders have been operating under a uniform standard test approach since 2004. Having two tests prior to 2004 resulted in inefficient litigation as to which test applied to which employees for which periods of time. The better course is to proceed with a standard duties test supported by a more realistic and fully indexed salary level that is a true test of whether employees worked in a bona fide exempt capacity.

In setting a new salary level, the Department must ensure that the salary level effectively distinguishes between overtime-eligible white collar employees whom Congress intended the FLSA to protect, and bona fide Executive, Administrative, and Professional (“EAP”) employees whom it intended to exempt. Bona fide EAP employees are those who typically earn salaries well above the minimum wage and enjoy privileges such as above-average fringe benefits, greater job security, and better opportunities for advancement.

As the Department has recognized, when the salary level becomes outdated, employees whom Congress intended to protect receive neither the higher salaries and benefits expected for EAP employees nor overtime pay, and employers do not have an efficient means of identifying workers who are entitled to FLSA protection.

The $455 per week threshold ($23,660 annually) that the Department set in 2004 is a prime example of how the salary level can become outdated and ineffective. In 2015, a worker earning $23,660 was under the poverty line for a family of four and yet still met the “white collar” salary threshold. See 81 Fed. Reg. 32,391, 32,396 (May 23, 2016) (Final Rule). Moreover, many of today’s salaried workers earning more than this threshold lack the pay, privileges, and protections that distinguish bona fide EAP employees.

Adjusting the 2004 salary level for inflation will not address this problem. As the Department acknowledged at the time, the standard duties test that the Department established in the 2004 Final Rule paired a duties test closely related to the less-stringent short duties test with a salary level derived from the lower long test salary level. See 69 Fed. Reg. 22,126, 22,168 (Apr. 23, 2004). This was an error because, historically, the Department set the short test salary level significantly higher than the long test salary levels (ranging from approximately 130 to 180 percent of the long test salary levels). See Final Rule at 32,403. As a result, in the ensuing years, employers classified many lower paid workers who performed little EAP work as exempt even though their work was often indistinguishable from overtime-eligible co-workers. These workers would have failed the long duties test, and thus should have been overtime-eligible. As the Department recently opined:
Rather than pair the standard duties test with a salary level based on the higher short test salary level, the Department tied the new standard duties test to a salary level based on the long duties test. This resulted in a standard salary level that, even in 2004, was too low to effectively screen out from the exemption overtime-eligible white collar employees.
Final Rule at 32,404.

Under the short test salary threshold that the Ford administration established in 1975, sixty-two percent of full-time salaried workers were eligible for overtime protection. The 20th percentile standard the Department adopted in 2004—especially if it is based upon the salaries of retail workers in the South—continues to exclude from overtime protection a significant number of likely non-exempt employees at the lowest levels of the income ladder.9

To correct this error, the Department should set the standard salary level equal to a higher percentile of earnings of full-time salaried workers. In the 2016 Final Rule, the Department determined that, “[b]ased on the historical relationship of the short test salary level to the long test salary level, . . . a salary between approximately the 35th and 55th percentiles of weekly earnings of full-time salaried workers nationwide would work appropriately with the standard duties test.” Final Rule at 32,404. NELA recommends that the Department adopt a threshold reflecting the 50th earnings percentile of full-time salaried workers. A significant increase in the percentile used is necessary not only to account for the declining real value of the salary threshold, but also to correct for the fact that the Department set the standard salary level in 2004 without adjusting for the elimination of the more rigorous long duties test.

The 50th percentile standard NELA proposes is below the standard used in 1975. The median salary is useful because it is a conservative estimate of the relative “status” that the EAP exemption embodies. A threshold based on the median would create the clearest and simplest dividing line between the top-half and the bottom-half of salaried workers, reflecting a low estimate of what it means to be a high-level “white collar” employee.

A salary threshold based on the median full-time salary is conservative from the perspective of how this figure relates to the median wage of all full-time American workers. The short test threshold from 1975 was 1.57 times the median wage of all full-time wage and salary workers at that time. Using the same ratio today, based on wage data from the first quarter of 2015, would result in a salary threshold of $65,965 a year. See U.S. Bureau of Labor Statistics Press Release, “Usual Weekly Earnings of Wage and Salary Workers, First Quarter 2015,” (Apr. 21, 2015) available at: http://www.bls.gov/news.release/archives/wkyeng_04212015.pdf (based on median national weekly earnings of $808 for full-time wage and salary workers).

Increases in the cost of living also show that the 50th earnings percentile is a more appropriate benchmark for the standard salary level. If the Ford administration’s 1975 short test salary threshold were adjusted for 2013 dollars, it would result in salary level of $1,083 per week. This is just over the 50th percentile of weekly earnings for all full-time salaries workers today. See 80 Fed. Reg. 38,516, 38,533 (July 6, 2015) (NPRM).

For the reasons above, NELA urges the Department to base its threshold on the median full-time salary. As the Minimum Wage Study Commission noted in 1981, the lower the salary threshold, the easier it is “for employers to claim the exemption for workers who would otherwise be entitled to premium pay for overtime . . . defeat[ing] the ‘good faith’ aspects of the test.” See 1981 MWSC Report. This is the concern today. A threshold based on the median full-time salary better addresses this concern. It is a clear, simple indicator of the true managerial status that often reduces an employee’s need for the FLSA’s protection.

 
QUESTION NO. 2:

Should the regulations contain multiple standard salary levels? If so, how should these levels be set: by size of employer, census region, census division, state, metropolitan statistical area, or some other method? For example, should the regulations set multiple salary levels using a percentage based adjustment like that used by the federal government in the General Schedule Locality Area to adjust for the varying cost-of-living across different parts of the United States? What would the impact of multiple standard salary levels be on particular regions or industries, and on employers with locations in more than one state?

Short Answer:
Consistent with prior practice, the Department should maintain a single nationwide salary level. Multiple salary levels would be administratively burdensome and would increase litigation.

Full Answer:
NELA does not support setting multiple standard salary levels because it will create a patchwork system that is difficult for employees to understand and for employers to enforce. The FLSA has always provided “a national floor under which wage protections cannot drop.” Pac. Merch. Shipping Ass’n v. Aubry, 918 F.2d 1409, 1425 (9th Cir. 1990); Rogers v. City of Troy, N.Y., 148 F.3d 52, 57 (2d Cir. 1998) (“The FLSA sets a national ‘floor’ in terms of working conditions.”). The statute itself recognizes as much through its savings clause. 29 U.S.C. § 218 (“No provision of this chapter or of any order thereunder shall excuse noncompliance with any Federal or State law or municipal ordinance establishing a minimum wage higher than the minimum wage established under this chapter or a maximum work week lower than the maximum workweek established under this chapter”). Thus, Congress intended that states and municipalities might provide greater protections for employees where appropriate, but that the FLSA would serve as uniform, nationwide minimum standard for employee protection.

Accordingly, “[t]he Department has always maintained a salary level applicable to all areas and industries.” 81 Fed. Reg. 32,391, 32,396 (May 23, 2016) (Final Rule). The Department expressly addressed and rejected the idea of regional salary levels in 2004 and in 2016: “adopting multiple different salary levels is not administratively feasible ‘because of the large number of different salary levels this would require.’” Id. (quoting 69 Fed. Reg. 22,171 (2004)). The Department was correct then and it should not reverse course now.

Multiple salary levels would increase the compliance burden on employers. The FLSA and the applicable regulations have never had regional variations in qualifying salaries or different salaries for different industries. There is no reason to change that historical commitment to a national floor to protect employees now. Such a change would create numerous administrative and enforcement complications. Geographically-based compensation levels would incentivize employers to hire in certain geographic areas, disrupting employment markets.

Industry-based compensation levels would also increase the compliance burden, as it would force employers of all stripes, including small businesses, to determine the proper industry classification. Simply put, the creation of multiple compensation levels is contrary to the current administration’s stated goal of reducing regulatory burden.

Different salary levels would also increase litigation. For example, geographic salary levels would lead to uncertainty regarding employees who travel, telecommute, or otherwise work in two or more regions. Industry-specific compensation levels would lead to litigation over whether the employer fits within the claimed industry. See, e.g., Alvarado v. Corp. Cleaning Servs., Inc., 782 F.3d 365, 369 (7th Cir. 2015) (assessing whether employer qualified as a “retail or services establishment”). Levels tied to the size of the employer would be burdensome to growing or shrinking employers, and could lead to litigation over the parameters used to measure employer size. No matter the criteria, differing compensation levels would entice employers to push the boundaries and force employees to challenge their classification.

The Department has only updated the salary levels twice in the past 42 years and the most recent update is embroiled in a legal challenge. See discussion supra at 3-5. The notice and comment process carries with it substantial administrative burdens, and those burdens would only increase if the Department created multiple salary levels. The Department therefore should set a single salary level that protects workers across the country.

 
QUESTION NO. 3:

Should the Department set different standard salary levels for the executive, administrative and professional exemptions as it did prior to 2004 and if so, should there be a lower salary for executive and administrative employees as was done from 1963 until the 2004 rulemaking? What would the effect be on employers and employees?

NELA does not support setting different standard salary levels for the executive, administrative, and professional exemptions. First, the assumption that a lower salary should apply to executive and administrative employees is flawed. High-level executive pay has grown exponentially in recent decades, arguing in favor of a higher standard salary for the types of executives and administrators the FLSA was meant to exempt. See, e.g., Lawrence Mishel and Alyssa Davis, Top CEOs Make 300 Times More than Typical Workers: Pay Growth Surpasses Stock Gains and Wage Growth of Top 0.1 Percent (Washington, DC: Economic Policy Institute, 2015).

Second, the duties requirements of these exemptions overlap in some areas, and thus, there would likely still be disputes over which exemption(s) applied to which employees. As the 2004 Final Rule acknowledged, identifying precisely which exemption applies given the overlap in duties can be complicated and time-consuming. 69 Fed. Reg. 22126, 22127 (Apr. 23, 2004).

 
QUESTION NO. 4:


To be an effective measure for determining exemption status, should the standard salary level be set within the historical range of the short test salary level, at the long test salary level, between the short and long test salary levels, or should it be based on some other methodology? Would a standard salary level based on each of these methodologies work effectively with the standard duties test or would changes to the duties test be needed?

Short Answer:
The standard salary level test should be set at a level in which it can properly perform its historical role of simplifying enforcement and protecting overtime eligible employees. The salary test has long been recognized as the best single test of exempt status but its role has been eroded both by inflation and by the Department’s mistake in 2004 in setting the salary level to match the old long duties test. The standard salary test should be set at the level the 50th earnings percentile of fulltime salaried workers preferably. The Department should not make unnecessary changes to the duties test at this point in time as stakeholders, including employers, employee advocates, and the judiciary have expended considerable resources adjusting to the 2004 overhaul of the regulatory scheme and all concerned are best served by some continuity going forward.

Full Answer:
The salary level test is the “best single test” of exempt status. Kearns, The Fair Labor Standards Act, Third Edition, 5-27; 29 Fed. Reg. at 22,165 (quoting Stein Report). It simplifies enforcement by screening out obviously non-exempt employees and provides an objective basis for the exemption determination that is not subject to interpretations of regulatory duties tests. As such, it serves to reduce unnecessary litigation of the EAP exemptions. There is simply “no satisfactory substitute for the salary test.” 29 Fed. Reg. at 22,165. The salary level test has been included in the EAP exemption criteria since the original 1938 regulations, and has been updated regularly since then, in 1940, 1949, 1958, 1963, 1970, 1975, 2004, and 2016. The present concerns arise primarily from the long hiatus in regulatory review between 1975 and 2004 (nearly two decades of inflation) and again between 2004 and 2016 (an additional 12 years of inflation). The chart below starkly illustrates this problem:

Date Enacted Long Test Short Test (all)
Executive Administrative Professional
1938 $   30 $   30    
1940  30 50 $   50  
1949  55 75 75  $ 100
1958 80 95 95 125
1963 100 100 115 150
1970 125 125 140 200
1975

155

155 170 250
     Standard Test
2004 $455      
2016 $913      
 
The Department compounded concerns about the salary test when, in 2004, it abandoned the separate salary levels for the long test and short test for the duties component of the EAP exemptions. When the Department established, in their place, a single standard test for the duty analysis, it also set a single standard salary level test at $455/week. The Department’s new standard salary level test “was updated from the [lower] long test salary…” 29 Fed. Reg. at 38,526. As the Department recently recognized, “[t]his resulted in a standard salary level that, even in 2004, was too low to effectively screen out from the exemption overtime-eligible white collar employees.” 81 Fed. Reg. 32,391, 32,404 (May 23, 2016) (Final Rule).

Accordingly, NELA proposes that that standard salary level test should be set at the 50th earnings percentile of full-time salaried workers. NELA does recognize that the Department’s 2016 Final Rule setting the standard salary level at the 40th earnings percentile of fulltime salaried workers is a major step in the right direction. At the 40th percentile level, the overwhelming majority of employees who legitimately meet the duties test will also earn more than the salary level test.

NELA is opposed to further revisions to the duties test at this time. The employment law and human resources community invested heavily in compliance with the drastic overhaul of the EAP regulations in 2004. Courts are still grappling with questions of interpretation arising from the fundamental changes that were imposed at that time. Moreover, many employers invested heavily again in preparing to comply with the 2016 Final Rule updating the salary level tests. Each time the Department changes these basic regulations, a tremendous education effort is required in order to provide appropriate compliance assistance to millions of workplaces, both employers and employees. Confusion about their fundamental rights to overtime pay is unhealthy to workers who are trying to choose their careers and to feed their families. While elections have consequences, workers’ livelihoods should not be subjected to drastic rollbacks simply because of regime changes. All the stakeholders in our labor market should be able to plan confidently, relying on some inherent consistency and continuity in the underlying rules. Given the upheaval arising from the 2004 regulatory overhaul and the controversy arising from the litigation challenging the 2016 Final Rule, this is not an opportune time for further rewriting of the duties tests. Rather, it is apparent from the Department’s analysis that the salary levels set in the 2016 Final Rule work well with the duties test as currently in effect.

 
QUESTION NO. 5:

Does the standard salary level set in the 2016 Final Rule work effectively with the standard duties test or, instead, does it in effect eclipse the role of the duties test in determining exemption status? At what salary level does the duties test no longer fulfill its historical role in determining exempt status?

Short Answer:
The standard salary level test set in the 2016 Final Rule was carefully considered to ensure that it would operate effectively with the standard duties test. As such, it performs its historical role of protecting overtime eligible employees and of screening out obviously nonexempt employees by means of an objective test. For many years the prior salary level tests were so eroded by inflation as to serve no role at all in the EAP exemption analysis. The Department’s updating of the salary level test in 2016 restored the utility of the salary level test, a role played since the inception of FLSA enforcement in 1938. In other words, the salary level test was so low in the 1975-2016 time period that it no longer fulfilled its historic role in determining exempt status. In 2016, the Department’s analysis demonstrated a substantial overlap between employees who were exempt under both the salary level and duties tests. Only upon a showing that the salary level test was set so low (as in the 1975-2016 period) that it failed to screen out obviously nonexempt workers, could one conclude that it was not fulfilling its historic role.

Full Answer:
The EAP exemptions are premised on the belief that the exempted workers typically earned salaries well above the minimum wage and were presumed to enjoy higher levels of compensation, fringe benefits, prestige, job security, and opportunities for advancement to compensate them for longer hours of work. All this was intended by design to set apart exempt employees from nonexempt workers. Thus, the development of low paid exempt supervisors is a recent perversion of the intent of the FLSA-era drafters and regulators who would surely have been aghast at the idea of convenience store “managers” who earned scarcely more than minimum wage and could not support a family on their earnings.

For years prior to the promulgation of the 2016 Final Rule the salary level tests have been so low that they failed to work effectively with the duties tests to determine exemption status. NELA does not recall that the employer community was particularly vocal during these many years in advocating to raise the salary levels for the exemptions. In the years following the 1975 updating of the salary level tests, the $155 per week corresponding to the long duties test was so low that the long test effectively passed out of existence. As the Department itself recognized as to the standard salary level test, by 2015 the salary level of $455 per week ($23,660 per year) was below the poverty threshold for a family of four. 80 Fed. Reg. at 38,521. It seems beyond any reasonable dispute that the recent salary level tests have been eclipsed by inflation rather than the salary level tests eclipsing the duties tests.

In 2015, the Department spent months in response to a Presidential directive, determining an appropriate recalibration of the standard salary level. The Department conducted extensive outreach to stakeholders representing both employers and employees and, after publication of its proposed rule, reviewed thousands of public comments. The Department determined that it was appropriate to calibrate the standard salary level within the range of the former short test. The Department then analyzed whether the employees otherwise exempt by virtue of the duties test would also be exempt under the salary level test. The Department determined that 75% of white collar workers who did not meet the duties test also earned less than its proposed salary threshold. Similarly, the Department found that 78% of exempt white collar workers also met the then proposed threshold of $921 per week. Id. at 38,532. As such, it can hardly be concluded that the salary level test eclipsed the duties test. Rather, there appeared to be a match of duties and salaries.

In sum, the Department has allowed an unreasonably low salary level tests to persist for decades, tests that failed to do their job of screening out obviously nonexempt workers. This placed an undue burden on the duties test, complicated enforcement efforts, and strained the courts and NELA lawyers who were assisting workers in the protection of their overtime wages. Now, when the Department finally proposed a meaningful updating of the salary level so that it can potentially do its job, the Department appears to be considering rolling the salary level test back. If it were to do so, then the salary level test would truly be eclipsed. NELA simply sees no support for such a proposal at this time as there is scant, if any, evidence that the salary level test in the 2016 Rule is so high that it is improperly excluding workers who would otherwise meet the EAP duties tests.

 
QUESTION NO. 6:

To what extent did employers, in anticipation of the 2016 Final Rule’s effective date on December 1, 2016, increase salaries of exempt employees in order to retain their exempt status, decrease newly non-exempt employees’ hours or change their implicit hourly rates so that the total amount paid would remain the same, convert worker pay from salaries to hourly wages, or make changes to workplace policies either to limit employee flexibility to work after normal work hours or to track work performed during those times? Where these or other changes occurred, what has been the impact (both economic and non-economic) on the workplace for employers and employees? Did small businesses or other small entities encounter any unique challenges in preparing for the 2016 Final Rule’s effective dates? Did employers make any additional changes, such as reverting salaries of exempt employees to their prior (pre-rule) levels, after the preliminary injunction was issued?

Short Answer:
NELA does not have data with which to respond to this inquiry. Anecdotally, NELA members are aware that many employers large and small moved ahead with raising the salaries of their exempt EAP employees in advance of the 2016 Final Rule’s effective date on December 1, 2016. Perhaps the best example of this is the action taken by Wal-Mart to increase the starting salary of their entry level Assistant Managers to $48,500 in advance of the anticipated implementation of the Final Rule. News reports indicate that Wal-Mart has experienced tremendous success with its initiative to increase the compensation levels of both its exempt and non-exempt employees.

Full Answer:
NELA submits that all responsible employers should have reviewed their compensation practices in advance of the December 1, 2016 effective date of the Final Rule with the goal of coming into compliance. NELA assumes that responsible employers did so and, where necessary, adjusted their payroll practices accordingly. Employers had a variety of options to come into compliance, including hiring more employees to reduce the necessity for overtime pay, increasing salaries to meet the new salary level test, converting exempt employees to nonexempt status and paying them hourly wages, etc. See Michael Abcarian, “Employer Options as DOL Delays Overtime Exemption Rules,” Employment Law360, Dec. 8, 2015.

Employers’ HR departments around the country worked hard to prepare for the effective date and, in most cases, publicly announced the contemplated changes to their employees. Even once the injunction was issued, many employers moved “forward with their plans to comply with the expected changes, and those that . . . already made the change are unlikely to reverse that path.” Jess Krochtengel, “Blocked Overtime Rule Leaves Employers With Pay Dilemma,” Employment Law360, Nov. 23, 2016. Well known management side counsel opined, at the time, “If you’ve gone public in your workforce, it’s hard to turn back on that. You can, but I don’t know many companies that would be inclined to do so.”Id.

Industry leaders such as Wal-Mart pro-actively complied with the new rule in advance of the projected effective date. “Wal-Mart ups entry-level manager salaries ahead of overtime rule,” Business News, Oct. 11, 2016. It was widely reported that retail giant Wal-Mart raised salaries for its entry-level Assistant Managers from $45,000 to $48,500 annually. As Wal-Mart executive Randy Hargrove announced: “We think the starting rate of $48,500 a year … would make a lot of business sense for our company.” Id. Wal-Mart was, at the time, the largest private employer in the United States, employing 1.5 million workers. Even absent the regulatory incentive for higher salaries, Wal-Mart’s strategy in 2015-16 featured increased compensation for its EAP exempt as well as its nonexempt store level employees. Id.; see also, Neil Irwin, “How Did Walmart Get Cleaner Stores and Higher Sales? It Paid Its People More,” New York Times, Oct. 15, 2016. Wal-Mart determined that its low wage business model was hurting its sales and profits, driving away both good employees (who were leaving Wal-Mart because of low wages) and consumers (who were shopping elsewhere due to poor customer service arising from starvation level labor budgets). Once Wal-Mart changed its business model to invest more appropriately in its employees (by paying better salaries and higher hourly wages), consumer satisfaction and sales rebounded.

The national economy’s fragile recovery can scarcely afford a new round of pay cuts or a return to business models based on shrinking labor budgets. Employees, both EAP exempt and nonexempt, will be more productive where employers pay a fair wage—as demonstrated by Wal-Mart’s new business model. The federal government, which oversaw the recovery from the 2008 economic crash, must continue to encourage employers to pay appropriate salaries to its EAP white collar exempt (and other) employees. The Department should not reverse course at this critical time.

 
QUESTION NO. 7:

Would a test for exemption that relies solely on the duties performed by the employee without regard to the amount of salary paid by the employer be preferable to the current standard test?

Short Answer:
Absolutely not. A salary test is a vital and integral part of the test for the white collar exemptions. Eliminating a salary component from the test would undermine the statutory purposes of the exemption and be an unjustifiable and fundamental departure from the long established policies and regulations of the Department of Labor.

Full Answer:
In passing the FLSA, Congress sought to remedy “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.” 29 U.S.C. § 202. The core elements of its solution were guarantees of a minimum wage and overtime compensation for hours worked in excess of a forty-hour week. 29 U.S.C. §§ 206-07. Overtime compensation is central to the Act’s objectives because it reduces the likelihood that employers will subject employees to excessive workhours while ensuring that workers are compensated for working long hours at the expense of essential aspects of their lives, such as caring for young children, assisting senior family members with essential comfort and support, meeting ongoing family responsibilities, coaching Little League, attending dance recitals, and/or volunteering in the community. The basic premise of the FLSA is that the 40 hour week should be the norm for American workers, and that few employees should work more than 40 hours per week. The goal of the 40-hour work week is to improve workers’ productivity and general well-being, and also to encourage employers to hire additional employees rather than requiring their current employees to work substantial overtime hours. See Overnight Motor Transp. v. Missel, 316 U.S. 572, 576-77 (1942).

The U.S. Supreme Court has emphasized that the “breadth of coverage” of the FLSA’s overtime work rules is “vital to [its] mission” of establishing a national work week standard and that statutory exemptions to the Act should therefore be narrowly construed. Powell v. U.S. Cartridge Co., 399 U.S. 497, 516 (1950); Mitchell v. Kentucky Finance Co., 359 U.S. 290, 295 (1959). The presumption must be that all workers are covered. Powell, 399 U.S. at 516; Arnold v. Ben Kanosky, Inc., 361 U.S. 388, 392 (1960).

Since 1938, there has always been a salary test as part of the Department’s definition of which employees qualify for the white collar exemptions. The purpose of the salary test is and has always been to limit employer manipulation of job titles in an effort to avoid FLSA overtime pay responsibility. In 1938, in its first regulations on the EAP exemption, the Department introduced the minimum salary threshold as a core answer to this concern. See 3 Fed. Reg. 2,518 (Oct. 20, 1938). Below the minimum salary threshold, an employee was entitled to FLSA protections regardless of his or her title or job duties. Over the nearly eight decades that the Department has construed the EAP exemption, it has always viewed the exemption as triggered not merely by what an employee does in a corporation but, more importantly, by what an employee’s status implies about the compensation they receive. Compensation for bona fide executives, administrators, and professionals historically required “wages well above the minimum” and supposed privileges making up for the lack of overtime pay, such as “authority over others, opportunity for advancement, paid vacation and sick leave, and security of tenure.” 1981 MWSC Report at 243. Managerial titles and salaried status by themselves do not remove the need for FLSA’s protections unless also accompanied by considerably higher compensation and privileges. From the outset, the Department’s regulations construed the exemption as intended only for a narrow set of employees at the top of the economic ladder who did not need protection because, as the bosses themselves, they were not subject to the low wages and long hours that FLSA remedies.

The Department has always been concerned that employers would improperly classify their employees to avoid paying them the overtime compensation they deserved. This would be easy if an employer-provided job title were the primary measure of an employee’s executive, administrator, or professional status. A central tenet of the FLSA is that employer-provided labels or job titles are not determinative of an employee’s coverage under the Act. 29 C.F.R. § 541.2 (“A job title alone is insufficient to establish the exempt status of an employee. The exempt or nonexempt status of any particular employee must be determined on the basis of whether the employee’s salary and duties meet the requirements of the regulations in this part.”) The salary test most effectively provides a protection against employers who would provide cheaply given titles to workers who are not bona fide exempt EAP employees.

In 1940, the DOL determined the original salary qualifications for the administrative exemption with reference to the salary of certain white collar workers who performed non-exempt work, with the basic premise being that, to qualify for the exemption, the salary cut-off should be sufficiently high that only a very small percentage of these non-exempt white collar workers would satisfy the salary test:
Another guide in determining a reasonable salary qualification is the probable percentage of persons in certain types of occupations who would be exempted by various salary limitations. Obviously if a large percentage of persons in a highly routinized occupation would be exempted, the salary qualification fails to act as a differentiating factor between the clerical employee and the administrative employee.
Stein Report at 31.

The DOL therefore looked to the average earnings of stenographers, typists, secretaries, and bookkeepers as guides. In 1940, the DOL found that ten percent of stenographers, typists, and secretaries earned more than $1600 per year, almost five percent earned more than $1800, but less than one percent earned more than $2400. Id. Thus, if the salary test were set at $1600 or $1800 per year (which would encompass five to ten percent of stenographers, typists, and secretaries), the salary requirement would not “be adequate to guard against abuse.” Id. at 32. Similarly, over 20 percent of bookkeepers earned $40 per week, whereas only eight percent earned over $50 per week. Id. Accordingly, the DOL found “it is obvious that adequate protection for a group of workers who need the protection of the act because of habitually long hours is not provided unless the salary limit is raised to at least $50 per week.” Id. Thus, the DOL set the salary limits at $2400 per year or $200 per month––no employee earning less than this amount could fall within the administrative exemption. Id.; 29 C.F.R. § 541.2(A) (1940) (to be employed in administrative capacity, a worker must be “compensated for his services on a salary or fee basis at a rate of not less than $200 per month . . .”).

The DOL has consistently recognized that the terms “bona fide executive, administrative and professional” imply a certain prestige, status and importance, and the employee’s salary serves as one mark of his status in management or the professions. Over the years, the Department has made it clear that the standard salary threshold is an indispensable bright-line test that gives meaning to the “bona fide” language of the EAP exemption. As the Department noted in 1940, “[t]he final and most effective check on the validity of the claim for exemption is the payment of a salary commensurate with the importance supposedly accorded the duties in question.” Stein Report at 19. The DOL early on recognized that “a salary criterion constitutes the best and most easily applied test of the employer’s good faith in claiming that the person whose exemption is desired is actually of such importance to the firm that he is properly describable as an employee employed in a bona fide administrative capacity” and the salary figure must be set “high enough to prevent abuse.” Id. at 26. Later, in the 1958 Kantor Report, the Department again recognized that, generally speaking, salary is a good indicator of the degree of importance attached to a particular employee’s job and characterized the salary threshold as an “index of the status that sets off the bona fide executive from the working squad-leader.” Report and Recommendations on Proposed Revisions or Regulations, Part 541, Defining the Terms “Executive,” Administrative,” “Professional,” “Local Retailing Capacity,” [and] “Outside Salesman” (Washington: U.S. Govt. Print. Off., 1958) (Kantor Report) at 2, 4.

The DOL again recognized in 1981 that “some employees whose duties conform to the specifications set out in the regulations may not be receiving the compensatory privileges that are considered a vital part of the character of employment exempted under this provision of the FLSA. Thus, a salary commensurate with the duties and responsibilities expected of an executive, administrative, or professional employee has traditionally been considered to be ‘the single best test of the employer’s good faith.’” 1981 MWSC Report at 243.

In 2004, the DOL yet again recognized that the salary test is an integral part of the EAP exemption test and must be continually updated to make sure it is an effective tool to enforce the statutory purposes of the FLSA. As the DOL recognized: “Revisions to both the salary tests and the duties tests are necessary to restore the overtime protections intended by the FLSA which have eroded over the decades.” 29 C.F.R. Part 541 Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees; Final Rule Preamble, 69 Fed. Reg. 22,122 (April 23, 2004).

Finally, after an exhaustive analysis of the record and after considering over 293,000 comments, the DOL issued its Final Rule in 2016 updating and strengthening the salary test for the EAP exemption. The DOL stated that:
The Fair Labor Standards Act (FLSA or Act) guarantees a minimum wage for all hours worked during the workweek and overtime premium pay of not less than one and one-half times the employee’s regular rate of pay for hours worked over 40 in a workweek. While these protections extend to most workers, the FLSA does provide a number of exemptions. In this Final Rule, the Department of Labor (Department) revises final regulations under the FLSA implementing the exemption from minimum wage and overtime pay for executive, administrative, professional, outside sales, and computer employees. These exemptions are frequently referred to as the “EAP” or “white collar” exemptions. To be considered exempt under part 541, employees must meet certain minimum requirements related to their primary job duties and, in most instances, must be paid on a salary basis at not less than the minimum amounts specified in the regulations.

The Final Rule issued by the DOL in 2015 followed the historical and consistent policy of increasing the salary levels with the times to make sure that the EAP exemptions were limited to those high level employees who should be truly treated as exempt consistent with the FLSA’s purposes. Accordingly, the Department set the standard salary level for exempt EAP employees at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region.
Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 81 Fed. Reg. 32,391 (May 23, 2016).

The Department should be concerned first and foremost with guarding the purposes of the FLSA. Congress entrusted the Department to implement the FLSA consistent with the statutory intent to limit the white collar exemption to highly paid employees who are bona fide exempt. The Department must be able to determine, with some degree of certainty, that the number of exempt positions under the new regulations has not been significantly expanded. The DOL has historically and consistently deemed a salary qualification to be of prime importance in preventing employer abuse of the exemptions. Any attempt to suddenly drop the salary test after eight decades would be a clear abdication of its responsibility, inconsistent with the Department’s historical mission and an arbitrary and capricious act that could not withstand judicial scrutiny. Moreover, the salary test is far easier to administer and much less ambiguous to interpret than the duties test so a meaningful salary test would reduce the need for protracted litigation and expensive enforcement actions.

 
QUESTION NO. 8:

Does the salary level set in the 2016 Final Rule exclude from exemption particular occupations that have traditionally been covered by the exemption and, if so, what are those occupations? Do employees in those occupations perform more than 20 percent or 40 percent non-exempt work per week?

Short Answer:
Traditionally, the Department has always used an inclusive multi-prong test to determine exemption status. As a result, occupations historically covered by the exemption have met all the elements of the salary level, salary basis and duties tests in effect at the time. Accordingly, the 2016 Final Rule does not “exclude from exemption” occupations traditionally/historically covered by the exemption. Rather, the 2016 Final Rule follows the historic precedent of the Department and simply seeks to update the salary level to make it consistent with current economic conditions.

The 20% and 40% tests for non-exempt work were used as an adjunct to the duties tests when there was a both a long and short test––with the 20% and 40% tests for non-exempt work being incorporated into the long test that was coupled with a lower salary threshold in order to guard against the evil of employers improperly classifying lower paid employees as exempt.


Full Answer:
To answer a question about “occupations that have traditionally been covered by the exemption” and whether such employees “perform more than 20 percent or 40 percent non-exempt work per week” it is necessary to revisit the history of the regulations defining the EAP exemptions. The Department initially instituted a 20 percent cap on non-exempt work for executive and professional employees in 1940. See Stein Report at 14-15, 40. The Department added the 20 percent cap for administrative employees in 1949. In 1961, when Congress expanded FLSA coverage for employees of retail and service establishments, it amended Section 13(a)(1) to provide that exempt employees of such establishments could spend no more than 40 percent of their hours worked performing non-exempt work without losing the exemption. See Pub. L. 87-30, 75 Stat. 65, § 9 (May 5, 1961).

In contrast, as the regulations evolved, the duties requirements under the short test did not explicitly limit the amount of time an exempt employee could spend on non-exempt duties, but required that a higher salary threshold be met. The Department did not include the 20 percent and 40 percent caps on non-exempt work with the duties requirements in the short duties tests because it reasoned that if the higher salary threshold was met the 20 percent and 40 percent limits on non-exempt work would not be needed as part of the regulation to determine whether a worker was working in a bona fide exempt capacity. See Report and Recommendations on Proposed Revisions of Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (June 30, 1949) (Weiss Report) at 22-23.

The Department retained the “long test” and “short test” structure for the duties elements of the white collar exemptions for the next 50 years while simultaneously updating the salary threshold levels four times from 1958 to 1975. In 1958 the Department set the lower salary level (used with the long duties test) so as to exclude from the exemption approximately the lowest paid 10 percent of employees (in low wage regions and industries, as well as small businesses and towns) who nevertheless passed the long test for duties. See Kantor Report at 6-7.

Following a similar process in 1963 and 1970, the Department set the salary threshold at a level that also excluded a small percentage of employees who nevertheless satisfied the long duties test. See Tentative Decision on Proposed Rule Making Proceedings, 28 Fed. Reg. 7,002, 7,004 (July 9, 1963); 35 Fed. Reg. 883, 884 (Jan. 22, 1970).

In 1975, the Department adjusted the previous long test salary level for inflation and set what were intended to be “interim” salary levels. See 40 Fed. Reg. 7,091 (Feb. 19, 1975). At each of the salary level updates discussed above (1958, 1963 and 1970), the Department also set the short test salary level higher than the long test salary levels. 81 Fed. Reg. 32,391, 32,401 (May 23, 2016) (Final Rule). See also answer to Question 4 and accompanying chart, supra.

Although the 1975 salary levels were intended to be adjusted regularly, nearly 30 years passed before these “interim” salary levels were again addressed by the Department in 2004. By that time, the lower salary level (used in concert with the longer duties test) had become meaningless because it was below the amount a minimum wage hourly employee earned for a 40-hour workweek. Even the higher salary level (used with the shorter duties test) was only slightly above minimum wage. See 69 Fed. Reg. 22,122, 22,164 (Apr. 23, 2004).

To address these disparities and “modernize” the salary threshold and duties tests, the Department eliminated the long test /short test structure for duties analysis and created a new “standard” duties test which worked in concert with a single salary threshold requirement of $455 per week. (As discussed throughout these comments, the salary level set in 2004 was too low when it was set and given inflation has been eroded to the point where it utterly failed as an indicator or test of whether an employee is working in a bona fide exempt capacity). The new “standard” duties test, like the old short test duties requirement which it replaced, did not limit the amount of non-exempt work an exempt employee could perform. And the new uniform salary threshold level of $455 per week, like the lower salary level it replaced, was designed to exclude from the exemption approximately the bottom 20 percent of salaried employees in the South and in the retail industry, i.e., the lowest paid region and lowest paid industry. See Id. at 22,168. Also in 2004, the Department established the new “highly compensated employee” exemption which, in some respects, is analogous to the old short test for duties which worked concomitantly with the higher salary level. Under the “highly compensated employee” exemption, employees earning $100,000 or more per year are deemed exempt if they satisfy a very minimal duties test. See id. at 22,172-22,174.

In 2016, the Department finally updated the part 541 regulations to raise the standard salary level test to reflect 12 years of increases in salary levels nationwide. 81 Fed. Reg. 32,399-32,400. In keeping with historic practices, the Department also adjusted the standard salary level to be consistent correspond with an upward adjustment to the higher short duties test salary level and to exclude from exemption the bottom 40 percent of salaried workers in the lowest-wage Census Region (the South). Id. These adjustments resulted in increasing the salary threshold level from $455 to $913 per week. Id. at 32,405, 32,408. The Department also created an automatic updating mechanism to adjust the salary level every three years to ensure that it remained a meaningful test to determine exempt status. Id. at 32,438.

As the foregoing history reveals, from 1940 to 2004 “occupations that have traditionally been covered by the exemption” include all white collar occupations which have historically met the short duties test (with the higher salary threshold) and the long duties test (with the lower salary threshold). And since 2004, occupations traditionally covered by the exemption include all white collar occupations which have met the standard duties test and standard salary threshold. Importantly, however, the Department also has been historically sensitive to the fact that adjustments needed to be made to account for lower paid regions (e.g., the South) and lower paid occupations (e.g., the retail industry). As a result, over the course of the last 75 years the Department has consciously set the salary threshold level to carve out of the exemption a significant percentage of the lowest paid white collar employees who nevertheless would meet the applicable duties tests in effect at the time.

In NELA’s view, the Department must continue to operate with the same degree and level of socio-economic sensitivity it has historically used to prevent the duties test (which is ambiguous and creates costly litigation) from becoming the sole indicator of exempt status. The salary level must be high enough to ensure that those who could qualify under the regulations are not paid at salary levels far below those which are indicative of executive, administrative and professional status. Accordingly, NELA has always advocated that the salary level be set high enough to ameliorate such concerns—that is, set the salary level at the 50th earnings percentile of full time salaried workers.

 
QUESTION NO. 9

The 2016 Final Rule for the first time permitted non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. Is this an appropriate limit or should the regulations feature a different percentage cap? Is the amount of the standard salary level relevant in determining whether and to what extent such bonus payments should be credited?

Short Answer:
Non-discretionary bonuses and incentive payments (including commissions) should not make up any part of the standard salary level. If such payments are to be permitted to satisfy the salary level test, 10 percent should be the absolute maximum percentage allowed irrespective of the specific amount of the standard salary level. The Department should consider reducing the percentage to anything less than 10 percent or eliminating it altogether.

Full Answer:
In the 2016 Final Rule, the Department unnecessarily added a layer of regulatory confusion and the potential for employer abuse when it permitted non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. The Final Rule requires that these payments only have to be made on a quarterly basis. 29 C.F.R § 541.602(a)(3). Additionally, because these payments are most often tied directly to the quality or quantity of work performed, these payments are not indicative of an employee’s EAP exempt status. NELA continues to oppose the use of non-discretionary bonuses, incentive payments, and commissions to meet the salary level test. If the Department insists on permitting these payments to help meet the salary level tests, 10 percent of the salary level is an important and appropriate limit which should not change based on the standard salary level.

The Department “has long found that the payment of a fixed predetermined salary not subject to change based on the quantity or quality of work is a strong indicator of exempt EAP status. . . .” 81 Fed. Reg. 32,426 (May 23, 2016). However, non-discretionary bonuses and incentive pay are the antithesis of an unchanging, predetermined amount. One of the stated purposes of the salary basis test is to make sure exempt employees are guaranteed a minimum level of income that is dependable and predictable to meet their families’ monthly expenses before they are exempted from the protections of the overtime provisions of the FLSA.

The types of bonuses which the Department identifies as non-discretionary include bonuses that are announced to employees to induce them to work more steadily, rapidly, or efficiently; bonuses to remain with the employer; attendance bonuses; individual or group production bonuses; and bonuses for quality and accuracy of work. 29 C.F.R. § 778.211(c). Each of these bonuses is based, in some measure, on the quantity or quality of work, and are intended to incentivize workers of all types to perform their duties well. As such they run afoul of the salary concept in its entirety.

Complicating the issue further is that bonuses only need to be paid on a quarterly basis. This means employees could effectively take a 10 percent pay cut for 48 weeks a year and be “caught up” during a scant four weeks per year. Making less than the standard salary level for 92.3 percent of the year runs counter to decades of Department policy.

Further, employees who are paid salaries well in excess of the standard salary level would not be the employees affected. Those individuals easily meet the salary requirements which provide a strong indication of exempt status. Rather, it is the employee who is paid at or very near the standard salary level who is most affected. The individuals who are paid at or close to the standard salary line are the individuals who most need the guarantee of a set salary level before being deprived of overtime pay. NELA members have represented such individuals who are often front-line supervisors performing virtually all of the same tasks as nonexempt employees. Allowing up to 10 percent of the standard salary level to be deferred until later results in these employees receiving the same (or even lower) compensation as their nonexempt counterparts for the vast majority of the year.

Changing the salary threshold calculation to include nondiscretionary bonuses would also create a perverse incentive to employers to move towards implementing more deferred compensation pay structures. The balance of power in employment relationships recognizes that most employees have little to no bargaining power when it comes to negotiating compensation structures. By incentivizing deferred compensation, the Department is permitting the company to essentially take an interest free loan from its employees by retaining and using the excess capital for the better part of three months. At the same time, employees on these deferred compensation plans lose some of the benefit of their exempt status. For example, an exempt employee who chooses not to miss two hours of work one day to attend a child’s school function because the employee fears missing out on a weekly production metric is losing the benefit of being paid a predetermined amount per week whether the hours worked are few or many. While deferred compensation plans may be advantageous for employees paid well above the standard salary level, those paid at or near that level benefit more from a higher, steady, and predictable paycheck.

A goal of the Department’s revisions is to make the overtime exemptions easier to understand and implement. One stated goal of the current administration is to simplify regulations and their impact on businesses. Those goals are undermined by allowing nondiscretionary income, no matter how small the percentage, to satisfy the salary threshold. Business interests recognize that determining if bonuses are nondiscretionary or discretionary, as well as how much must be paid, is difficult and involves fact-intensive analysis. Whether a bonus is discretionary or non-discretionary is also the subject of litigation. Allowing bonus and incentive payments to count toward the standard salary level adds an additional and unnecessary layer of complication to what has historically been a very simple test. Putting the salary basis test at issue on a weekly, monthly, or quarterly basis will lead to increased monitoring and compliance costs for employers, as well as higher monitoring costs for the Department, and increased litigation over whether the salary basis test has been satisfied.

Finally, the amount of the standard salary level should irrelevant in determining whether and to what extent such bonus payments should be credited. Based on the comments from some employer organizations during the promulgation of the Final Rule, the underpinning of this question is really whether the percentage should go up if the standard salary level goes up, which would provide an employer-friendly offset to the requirement of an immediate increase in the standard salary level. Even asking this question places the interests of the employer over those of the employee in the context of the FLSA––a law intended to protect employees. Allowing a higher percentage cap would exacerbate the impacts described above on lower level “exempt” employees. Employees should not be forced to receive only 60, 70, or 80 percent of their so-called “predetermined” wages for 92.3 percent of the year. The Department has already considered this issue and determined that “[t]o ensure the integrity of the salary basis requirement, the Department stressed the importance of strictly limiting the amount of the salary requirement that could be satisfied through the payment of nondiscretionary bonuses and incentive pay, as well as the maximum time period between such payments.” 81 Fed. Reg. 32,423 (May 23, 2016). The Department should not countenance a further erosion of the salary basis of pay to ease the burden on employers of meeting a higher standard salary level which should be incrementally adjusted for inflation in the first place.

 
QUESTION NO. 10:

Should there be multiple total annual compensation levels for the highly compensated employee exemption? If so, how should they be set: by size of employer, census region, census division, state, metropolitan statistical area, or some other method? For example, should the regulations set multiple total annual compensation levels using a percentage based adjustment like that used by the federal government in the General Schedule Locality Areas to adjust for the varying cost-of-living across different parts of the United States? What would the impact of multiple total annual compensation levels be on particular regions or industries?

As discussed in response to Question 2, supra, the FLSA has always provided “a national floor under which wage protections cannot drop.” Pac. Merch. Shipping Ass’n, 918 F.2d at 1425. For the same reasons discussed in response to Question 2 regarding salary levels, NELA believes the Department should maintain a single, nationwide compensation level for the highly compensated exemption. Multiple compensation levels would be administratively burdensome and would increase litigation.

 
QUESTION NO. 11:

Should the standard salary level and the highly compensated employee total annual compensation level be automatically updated on a periodic basis to ensure that they remain effective, in combination with their respective duties tests, at identifying exempt employees? If so, what mechanism should be used for the automatic update, should automatic updates be delayed during periods of negative economic growth, and what should the time period be between updates to reflect long term economic conditions?

Short Answer:
The Department should retain the procedure for automatically updating the standard salary level and highly compensated employee exemption (“HCE”) total annual compensation level established in the 2016 Final Rule. Setting the standard salary level and the HCE compensation requirement according to CPS data and updating these requirements triennially, again using CPS data, allows the Department to carry out Congressional intent while maximizing government efficiency.

Full Answer:
The Department created the highly compensated exemption in 2004. At the time, it declined to implement automatic updating to the standard salary level or the HCE total compensation level, but committed to “update the salary levels on a more regular basis.” 69 Fed. Reg. 22,122 (Apr. 23, 2004). Unfortunately, experience has proven that relying on “resource-intensive notice and comment rulemaking” to update compensation levels is a cumbersome and inefficient process. As the Department recognized in 2016, “the salary level test is only a strong measure of exempt status if it is up to date, and that left unchanged the test becomes substantially less effective as wages for overtime-protected workers increase over time.” The same is true for the HCE total compensation level.

Recognizing the need for current standards and the burden associated with notice and comment rule making, the Department instituted automatic updates for the salary level the HCE compensation threshold in the 2016 Final Rule. It should not change that position now. Failure to automatically update these levels undermines Congressional intent to exempt only “bona fide” EAP workers from overtime requirements, because the impact of wage increases during long periods between revisions cause the real value of the threshold to decrease dramatically. 81 Fed. Reg. 32,526 (May 23, 2016). The decrease in real value means that the exemption “covers workers who were never intended to be within the exemption.” Id.

Without automatic updating, the Department is left to repeatedly undertake resource-intensive notice and comment rulemaking, placing an undue administrative burden on the Department and on stakeholders who must participate in the notice and comment process. Moreover, the rulemaking process can result in litigation that further delays meaningful updates to the appropriate required salary levels. The current administration’s stated goal of a streamlined government is best served by retaining automatic updates to the salary basis level and HCE total compensation level.

The Department should also confirm its previous decision to adopt the CPS as the index for updating these levels. Since 2004, the Department has maintained that CPS data is the “best available data for setting the salary threshold” because it is comprehensive in size and scope: “it surveys 60,000 households a month, covering a nationally representative sample of workers, industries, and geographic areas.” 81 Fed. Reg. at 32,414. Because the CPS data is the best source for setting the compensation requirements, the Department should also use it to update those levels. Use of any other index, such as a price index, would decouple increases from the original source data. Id. at 32,441 (“While wages and prices may be correlated in the long-run, linking the salary level to earnings is the most direct way to ensure that the salary level reflects prevailing economic conditions and can thus fulfill its intended function.”).

Although NELA believes annual updating would be appropriate, NELA recognizes that the Department confirmed triannual updates in its most recent rulemaking. NELA believes the Department should maintain the three-year schedule for updating the salary basis and HCE total compensation levels. This schedule “strikes an appropriate balance between ensuring that the salary level remains an effective ‘line of demarcation’ and not burdening employers or their workforces with possible changes to exemption status on a yearly basis.” Id. at 32,438. These triannual updates adequately control for any negative economic growth that is reflected in wages nationwide. Additional controls for negative economic growth are therefore unnecessary and would divorce the compensation levels from the salary data on which they are based.

 
CONCLUSION.


NELA appreciates the opportunity to provide the Department with its comments in response to the Department’s RFI. Based on the foregoing, NELA urges the Department to implement and enforce the 2016 Final Rule and appeal the Order granting summary judgment in Nevada, et al. v. U.S. Dep’t of Labor, No. 4:16-CV-731 (E.D. Tex. Aug. 31, 2017)

Respectfully submitted,

Matthew C. Koski
Program Director
National Employment Lawyers Association
2201 Broadway, Suite 310
Oakland, CA 94612

 


[1] The current Administration failed to defend the 2016 Regulation in the proceedings before Judge Mazzant, and there are now no parties in the proceedings with an apparent interest in defending the properly promulgated 2016 Final Rule. While the preceding Administration originally appealed the preliminary injunction ruling, the DOL stipulated to its dismissal of the appeal of the preliminary injunction after the recent summary judgment ruling, and has given no indication that it will appeal Judge Mazzant’s erroneous summary judgment order. Moreover, Judge Mazzant denied the AFL-CIO an opportunity to intervene to defend the Rule, even though he allowed the Chamber of Commerce to intervene to challenge it.  The result is that the interests of millions of workers who would have been protected by the 2016 Final Rule may go unrepresented, and therefore unprotected, in the proceedings challenging that Rule.

[2] The opinion twice uses the phrase “more than doubles” in referring to the salary level in the Final Rule.  S.J. Order, at *8, 9.

[3] Executive, Administrative, Professional . . . Outside Salesman Redefined, Wage and Hour Division, U.S. Department of Labor, Report and Recommendations of the Presiding Officer (Harold Stein) at Hearings Preliminary to Redefinition (Oct. 10, 1940) (“Stein Report”) at 19.

[4] Id. at 26.

[5] Final Report of the Minimum Wage Study Commission, Volume IV (1981) (1981 MWSC Report) at 243 (“Thus, a salary commensurate with the duties and responsibilities expected of an executive, administrative, or professional employee has traditionally been considered to be ‘the single best test of the employer’s good faith.’”) 

[6]  Judge Mazzant’s finding that the Department’s Final Rule was “unreasonable” is also predicated the erroneous proposition that substantially raising the salary level inherently ignores the duties tests.  It does not. That error is exposed by asking the question, “Would a janitor be exempt under the EAP exemption simply because his salary was increased to $913 or more per week?” The clear answer is “no,” because the janitor would fail to meet the duties test prong of the standard for EAP exemptions.

[7] Judge Mazzant’s conclusion that the 2016 Final Rule would exclude so many employees who perform exempt duties is both legally flawed (in that it refuses to acknowledge that performing exempt duties is not, by itself, dispositive of whether an employee is “employed in a bona fide executive, administrative or professional capacity”) and is devoid of any citation to the factual or administrative record reviewed by the DOL in 2016. 

[8] The validity of the salary test has been upheld repeatedly, including in the Fifth Circuit, where Judge Mazzant’s court is located.  See, e.g., Usery v. Associated Drugs, 538 F.2d 1191, 1193 (5th Cir. 1976), See also Craig v. Far West Engineering Co., 265 F.2d 251. 259 (9th Cir. 1959) (holding salary test is “reasonable exercise of [administrative] authority”).

[9] Relying on a lower percentile and the salaries of workers in the lowest-paid region (the South) and industry (retail) would further erode the effectiveness of the salary level. According to the Department, in the retail industry, the 40th percentile of full-time salaried employees nationally is $848 per week, which is below the low end of the historical range of the short test salary and thus cannot be paired with the standard duties test.  Final Rule at 32,409. Moreover, to be practicable, the salary level must account for both higher and lower-wage industries.

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